Standard Life News
US Election Results
Donald Trump has won the Presidential election. The Republicans also retained their majorities in both the House of Representatives and the Senate.
Heightened uncertainty
Trump’s election introduces significant uncertainty to the outlook for government policy, economic activity and the Federal Reserve (the central bank of the United States or the Fed). Market volatility has spiked in reaction to the result and we expect this to continue over the coming weeks as speculation builds about his likely policy agenda.
However, at Standard Life Investments, we stress how important it is to not overreact to this noise and instead to wait for clear announcements of priorities.
Prioritising tax cuts and relaxing regulation
Both the President elect and Republicans in the House of Representatives placed large tax cuts and corporate tax reform at the heart of their financial agenda. Mr Trump has also advocated a large increase in infrastructure spending. With Republicans also controlling the Senate, this implies that a meaningful change to the financial policy is likely from late 2017 and into 2018. There’s a strong possibility that regulations will be relaxed across several sectors, including finance, energy, telecommunications and healthcare.
Trade policy will be pivotal for the economy
Taken at face value, these policies would boost economic activity over the next two years.
However, Mr Trump has pledged to increase trade protection and cut back on immigration – policies that would simultaneously weaken growth and lift inflationary pressures. We suspect the new administration won’t ramp up tariffs on Mexican and Chinese imports but rather bury the prospect of new trade agreements and will make more use of the enforcement clauses in existing agreements.
And the Fed…
If this happens, there’s a greater chance the Fed will delay lifting interest rates into 2017 as it waits until there’s more clarity on market and policy outlooks. Once the noise has died down and it becomes clear the financial policy aims to help encourage economic growth, we think the Fed’s likely to begin lifting rates, and at a faster pace than previously.
On the other hand, if President Trump turns out to be serious about pursuing a much more protectionist policy agenda, the negative consequences for economic activity and corporate margins could easily offset the benefits of any financial easing which has previously been done to help boost the economy.
This would prevent the Fed from increasing interest rates for some time. And, if the outcomes of Trump’s protectionist policy agenda are especially disruptive, the Fed could even consider easing policy. The subsequent effect would determine when and how the Fed would begin to reduce inflationary pressures once the turmoil subsided.
Market implications
The election result initially caused markets to move to perceived safer environments, with bonds rallying and riskier investment types, including equities, declining substantially. The US dollar was broadly stable, as it generally fell against the major developed currencies and rose against emerging market currencies, especially the Mexican Peso.
However, the immediate reaction turned around on an expectation that President elect Trump and Republicans in full control of Congress would agree to push through a business friendly programme, for example infrastructure spending and tax cuts. Hence there has been a more positive tone to US assets, although concerns about Trump’s external programme – tariffs and migration controls – have caused emerging market currency to under-perform.
This volatile market mood could last several months. The longer-term implications for markets will depend on the actual policies of President Trump and what can be negotiated through Congress in 2017. His speeches and announcements about key individuals, such as the Treasury Secretary, will be seen as important markers this autumn.
At Standard Life Investments, we believe a number of positive and negative forces will influence how the dollar moves over the longer term: on the one hand Fed policy and any corporate repatriation of overseas cash, on the other hand the extent of tariff and migration changes. We expect government bond yields to be supported in the short term by strong central bank buying of global bonds, but how that will play out over the coming months will depend on the extent of changes to US fiscal policy, the implications for inflation expectations and the Fed’s response.
Once the initial volatility in equity markets subsides, we think lower corporate taxes and looser regulatory policies could provide a lift to corporate profits into 2017-18. However, any increase in the US dollar or higher interest rates would be influential for certain sectors. Stock picking remains important.
All in all, such an environment should create opportunities for investors focusing at a company level. Firms with extensive global exposure or those which are reliant on migrant labour would face a more uncertain future; firms that expected to face onerous regulatory requirements or could take advantage of higher government spending, say on defence or construction, might stand to benefit.
If the new administration begins to aggressively undo previous policies that have supported globalisation, it is likely we’ll see a hit to investor sentiment and therefore an extended period of weakness for risk investments such as equities.
In summary
Clearly it’s too early to fully assess the implications of the election result on markets, politics and the economy. With the political landscape set to change in the US, it could impact many countries and regions of the world. So, it’s more important than ever to have a well-diversified portfolio, as is taking a long-term view. However, we’ll be providing more updates from Standard Life Investments when there’s more clarity on the policies of the new Trump administration.
Author: Standard Life Investment’s Global Strategy Team
"The Minister and his government cannot want to unfairly penalise people prudently saving for a home, their children’s education, a rainy day or other life necessities"
Jennifer Richards, Head of Standard Life Ireland.
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