Pollster forecasts, much like Central bank policies, appear to have lost essentially all credibility. The US electorate has defied predictions and elected Donald Trump as the next President of the United States.
In this article, we’ll discuss the impacts as we see them as well as putting this into the wider context of the politics of the disenfranchised. Before delving further though, it is worth saying upfront that our guidance, as usual, is not to panic, to resist the urge to start making aggressive changes to your portfolio, and instead to reflect on any changes to the fundamental economic and market landscape. As with the EU referendum earlier in the year, this outcome was always a possibility, and is something we have considered as part of our investment strategy and continue to monitor closely.
Equities and the US dollar sold off while safe havens rallied
Markets initially reacted as expected to this shock. Equity markets and the US dollar sold off whilst perceived ‘safe havens’ including gold and US government bonds rallied. However, a couple of hours after the initial result, most markets had pared back these losses as instinctive reactions from traders gave way to more considered views. Volatility is likely to persist as investors digest what has happened, but there is rarely much benefit in investors trying to trade during such volatile periods.
The impact on the investment outlook
Of more relevance to us is the fundamental impact on the investment outlook – which for the immediate future seems little changed. President-Elect Trump made a lot of fairly alarmist noises on the campaign trail, but how much of that is bluster and how much is substance will have to be seen. Already he has started making more conciliatory statements, recognising the especially divisive nature of this election.
It is also worth bearing in mind the checks and balances that are baked into the US political system, where the president’s powers are heavily constrained by the will of Congress. The Congress elections have garnered less attention than the presidential equivalent, but they are also an important part of the equation. The Republicans managed to retain control of both houses of Congress (though only narrowly in the Senate). Usually this would be a strong boost to a Republican president, but the last couple of months have been particularly fractious between the party and its presidential nominee, meaning there are a lot of bridges that need rebuilding if Mr Trump is to get anything meaningful done.
Trump’s policies – global free trade and fiscal stimulus?
It is difficult to know what Mr Trump’s policies will actually be. But from what we do know, he is likely to take aim at global free trade deals (not great for an already-challenged global economy, particularly emerging markets) and immigration (with its impact on the US labour market).
At the same time, with the support of the Republicans he is likely to bring forward fiscal stimulus measures in the form of additional government spending and tax cuts. Such fiscal measures could provide a boost to a US economy, though the long-term sustainability is still very much in question. However, the benefit to asset prices could well be offset as support from monetary stimulus provided by the Federal Reserve loses efficacy.
We are wary of US equities
We remain wary of US equities, and will consider taking profits on US Treasuries, which have benefited in the immediate aftermath of the election. However, we expect them to come under pressure as the Government increases fiscal stimulus, which as well as being inherently unsupportive for government bonds could also drive inflation expectations higher. In the medium term we expect US Treasury yields to increase from here (meaning prices will decrease) and the yield curve to steepen, though the exact timing is almost impossible to know.
The politics of the disenfranchised
We see this latest political shock as part of a growing theme that we’ve talked and written about before – the politics of the disenfranchised. There is a growing sense that in the post-Global Financial Crisis (GFC) period we have witnessed an economic recovery that doesn’t feel like a recovery to your average member of the electorate.
Policies such as quantitative easing have boosted asset prices and helped those reliant on their financial capital, but haven't helped those relying on their human capital. Real wages (after inflation) have consistently fallen in the UK since the GFC. This has driven wealth and social inequality, and the perception of “the rich getting richer”, which has caused a shift towards anti-establishment politics as people reject the status quo.
This has manifested in the EU referendum and the rise of Jeremy Corbyn in the UK, growing popularity of the far-left Syriza party and far-right Golden Dawn party in Greece, and now with the election of Donald Trump in the US. This global theme is likely to continue, and could mark a further shift away from Central bank-led monetary policy towards government-led fiscal stimulus.
A shock to the markets – but the fundamentals haven’t changed
In conclusion, the election of Donald Trump as the next US president has been a shock to markets, but comes amid a rising tide of anti-establishment politics. Rather than knee-jerk reactions, we take this opportunity to reassess our fundamental outlook, and find that relatively little has changed.
We are cautiously positioned in our portfolios given the challenges we see to the global economy. Over the last twelve months we have reduced exposure to equities and bonds which have benefited the most from the monetary policy stimulus that has been losing efficacy. Instead, we have increased exposure to alternative asset classes such as gold and absolute return vehicles. We see these as providing diversification benefits and further return opportunities against a difficult economic backdrop.
Whilst our portfolios are positioned to participate to some degree in further broad market gains, our defensive stance aims to mitigate the downside in the event of falls in equity and bond markets. We will continue to monitor markets and economic indicators closely, updating our core investment strategy appropriately.
For more information on our investment outlook, please contact your usual Tilney representative. Alternatively, speak to us on 020 7189 2400 or firstname.lastname@example.org.
This article was previously published on Tilney prior to the launch of Evelyn Partners.