Bonds – are they as dull as people think?
Bonds have a reputation for being rather dull. They would be the dinner party guests that everyone...
In the second big, unexpected political outcome of 2016, Donald Trump was voted in as the 45th president of the United States of America on Tuesday. Markets saw an initial sell-off globally; however, as the day wore on reactions moderated and the UK stock market finished up around 1%1.
Responses to the result vary from uncertainty over emerging markets and extremely cautious views on US (and global) growth prospects in line with Trump’s protectionist rhetoric to more upbeat economic forecasts based on the cutting of corporate taxes and a predicted surge in infrastructure and defense spending. We take a look at what some of our Elite Rated fund groups are saying.
“An initial sell-off was always going to happen, but the falls are reversing much quicker than expected. The tone of Trump’s acceptance speech seems to have helped. There are clear worries, of course. Trump will need to reach out to those he alienated in the campaign and undo the damage done. Abroad, there will be concerns over foreign policy and an untried and unpredictable politician.However, the grandiose rhetoric is being dampened down early-on and there are now two more months to get a clearer picture of the actual detail and what he may do, rather than what he has said in the campaign.”
“Investors and the media usually overestimate political impacts on financial markets. Since 1932, the average return of the S&P 500 one month after a US election is -1.0%. After the shock of president Trump dissipates, markets will calm and could potentially cheer the business-friendly rhetoric and policies of both the candidate and the Republican party. “If economic and stock market uncertainty increases, it just pushes off rate hikes. In fact, the chance of a rate hike in December (implied by US dollar swaps) has now dropped to just 25%. Trump wants to lower personal and business income tax drastically. Tax cuts get spent, so this should be good for consumption. Also, he will likely reduce the tax take on stranded cash held overseas, a boon for many US companies which will be able repatriate hundreds of billions of dollars back to shareholders.”
“The president-elect and house Republicans have placed large tax cuts and corporate tax reform at the heart of their fiscal agenda. Trump has also advocated a large increase in infrastructure spending. With Republicans also controlling the senate, this implies a likely loosening of fiscal policy from late 2017 and into 2018, though fiscal conservatives in Congress may seek some offsetting cuts to other areas of discretionary spending. There is a strong prospect that the regulatory noose will loosen across finance, energy, telecoms and healthcare sectors.
“At face value, the above policy agenda would boost economic activity over the next two years. However, Trump has pledged to increase trade protection and reduce immigration – policies that would simultaneously weaken economic growth and increase inflationary pressures.
“In equities, once volatility subsides, lower corporate taxes and looser regulatory policies could provide a lift to markets. However, any increase in the US dollar or higher interest rates would be negative. If the new Trump administration pursues an aggressive unwinding of polices that have supported globalisation, an extended period of weakness for risk assets is likely. This environment is likely to create opportunities for ‘bottom-up’ stock-picking in both equity and bond markets.”
“Trump is the first US president to be elected who has never held formal political office nor a position in the military, so there are a lot of unknowns in how he will take decisions, and how he will fill his transition team.
“In the medium term, Trump’s protectionist agenda may weigh on global growth if pursued, with looser fiscal policy providing some offset. In combination, these measures could also lead to higher inflation. For now, we believe that the global economy will continue on its current path of a synchronised pick-up in growth, which should help market sentiment. However, this election result reinforces the sense that populism is on the rise globally and concerns are now likely to focus on how this phenomenon will impact other forthcoming elections.”
“So how will the Donald Trump presidency impact India? To be honest it is too early to tell but if his pre-election rhetoric against globalisation comes to play then even a domestic-focused economy like India will be impacted. Companies and sectors that are more export-focused have been underperforming for some time, but the giant Indian IT exporters are particularly in the cross-hairs. The outlook for these companies is now clouded as it may become necessary to employ more Americans to access the giant US market.
“The US dollar has initially weakened, which could have ramifications for emerging markets in general, including India. Of course, a weaker US dollar might bode well for flows into India, perhaps a reason why the Indian rupee has remained stable so far. Regardless of these initial moves, we must not forget that the India story is primarily a domestic one and is not reliant on global growth to drive the economy.”
“What seemed like an outlier result only 12 months ago has become true: Donald Trump has been elected US president. The reasons for this momentous event will be analysed for years to come, but in the immediate aftermath it appears that a widespread feeling of disenfranchisement among Americans and distrust of the establishment surely played an important role. Trump offered a protectionist, ‘America-first’ vision of the future that appealed to voters and he now needs to deliver this.
“Geopolitical risk has risen given Trump’s political inexperience, unpredictability and caustic manner. His proposed cuts to personal and corporate tax rates will help the economy in the short term, but the spectre of his increasingly protectionist policy agenda may undermine US economy in the long term.
“However, Trump is unabashedly pro-business, and the American political system has numerous checks and balances that should prevent him from enacting any of his ill-considered policy initiatives. The US has long been a great place to do business and it seems unlikely that any one individual—even the president—will materially change this.”
“The probability of a hike in interest rates in December, followed by two further hikes in 2017, has fallen sharply. The dollar, which has been trending higher in anticipation, has consequently reversed. Both were threats to the bull market, and these have now been postponed. Monetary policy will remain accommodative.
“Republican control of both Houses offers an opportunity to break the political gridlock of recent years in domestic areas of policy … but none of this will convince investors in the short term.”
“Trump’s election poses economic uncertainty. We wait to learn the administration’s priorities, particularly over the more populist campaign promises, as the balance between these and fiscal stimulus will shape the US economic outlook over the next 18 months.
“Economic uncertainty creates initial global risk-off reaction: global stocks and futures dropped significantly, currencies reacted in accordance with risk off and government bonds have gained markedly. Retracement of losses happened around time of conciliatory acceptance speech. “A US rate hike remains our central scenario, although we believe financial turbulence would dissuade the US Federal Reserve from tightening policy [raising rates] in December. Looking further afield, we believe the European Central Bank will refrain from any suggestions to tapering in December and we retain our call for 3-month extension of quantitative easing beyond March 2017. Policy uncertainty and concerns over trade policies also pose downside risks for Latin American and Asian markets.”
“As expectations of a Trump win grew last night, the US treasury bond market rallied aggressively. You might think this perverse given that Trump has openly discussed “haircutting” treasury investors, but this is a flight to quality response. The US Federal Reserve was seen as nailed on for a 25 bps hike in December, but the uncertainty impact of a Trump win makes this much less likely (and will Janet Yellen still be head of the Fed under a Trump regime?). “The big implication for investors of what happened last night is this: with no income growth for most populations in developed world economies since the great financial crisis, the established parties and candidates are being heavily punished in elections. It doesn’t stop here – we have a referendum on the Italian constitution next month, and many more European elections in 2017 (could Marine Le Pen be elected President in France?). Having seen the electoral shifts in the UK with Brexit and now the US, do established political parties react by promising significant fiscal expansions? Could last night’s vote trigger the end of global austerity?”
“Crucially for investors, the outlook for the US Federal Reserve (Fed) has become clouded. The central bank may well refrain from raising interest rates in December, as heightened uncertainty over the direction of macroeconomic policy under Trump is likely to curb spending by households, as well as hampering business and trade.
“The Fed could actually tighten policy if the central bank believes the fiscal easing pursued by the Trump administration will have more than a transitory impact on inflation. Adding to the uncertainty, however, is the possibility that Janet Yellen may not remain as in her post as Fed chair, due to the suspected animosity between her and the president elect.”
1Google Finance, UK FTSE All Share, 08/11/2016–09/11/2016