As US election week draws to a close, perhaps the biggest surprise so far (apart from the result) has been the resilience of markets. We suspect that this reflects uncertainty over what a Trump Presidency might actually do, rather than equanimity.
Trump’s platform was built on sweeping promises. How these now play out through the US political process is highly uncertain. While the Republican party may have won the presidency, control of the House of Representatives, and the Senate, many of Trump’s views run counter to traditional Republican values, notably fiscal conservatism and free trade.
Trump’s opposition to free trade agreements, such as the North American Free Trade Agreement (NAFTA) and the Trans-Pacific Partnership (TPP), and his threat of imposing tariffs on China suggest that we are about to enter a new era of protectionism. Markets are likely to view this as negative for world trade, and for emerging markets in particular, so we are carefully examining our positions in these regions.
Fiscal policy is likely to be loosened in the US and elsewhere, mainly by boosting spending on infrastructure. This may lead to the end of ultra-loose monetary policy. An increase in interest rates (or more technically, a steeper yield curve) would be negative for bond prices, especially long-duration government bonds. Our portfolios are already positioned to mitigate this risk (we are underweight bonds in general) but we are now considering whether further action is required. Prior to the election, the US Federal Reserve was expected to hike interest rates in December. We will be paying close attention to any signals that they still plan to go ahead, or hold fire in the face of jittery markets.
Another policy area that may impact our portfolio positioning is climate change. While the US has ratified the latest UN Paris agreement (in which countries committed to take the actions required to limit the rise in global temperature to 2 degrees Celsius above pre-industrial levels), Trump himself has denied the concept of global warming. Moreover, he has promised to stop paying for climate change mitigation measures, and to support US coal and shale oil producers. This could be bad news for US renewables, and we are reviewing our exposure – but we don’t believe that the long term prospect for environmental equities is reduced.
Elsewhere we remain confident in our thematic positioning. For example in healthcare, our exposure to pharmaceutical companies has already benefited from the election result and we are well-positioned across our model portfolios to benefit from the further opportunities in this sector.
In summary, the immediate result of the US election is unfortunately more political uncertainty. Under these circumstances our experience has taught us to proceed with caution, pay close attention, and avoid any knee-jerk reactions.
» If you have any questions about the above, please do not hesitate to contact us.