Henderson: US-election reaction: predictably unpredictable

2016 has been a year of surprises. Time and time again, investors have seen their best laid plans frustrated by improbable, seemingly unpredictable political events. To this end, the result of the US election was the ultimate embodiment of the last 12 months.  

While probability suggested that a Clinton victory was all but assured, once more the consensus was wrong. The consistency with which recent global events have produced unexpected outcomes is stunning. Expert opinion has consistently erred too closely to urban liberal values and has been too quick to dismiss the concerns of a disaffected electorate. As a result, the interpretation of traditionally-reliable indicators, such as opinion polls and the shape of the wider political narrative, have given too little weight to ‘improbable’ events. For many Trump supporters, unlike experienced commentators, victory always seemed like a distinct possibility.  

Once bitten, twice shy  

Contrary to expectations, the reaction in asset markets has been relatively calm. In part this is a reflection of the defensive positioning of many investors going into the election. Fresh from the travails of ‘Brexit’, fund managers had quietly rebuilt cash balances and defensive positioning against classic risk assets such as US high yield had increased substantially. A more constructive interpretation is that the underlying strength of the US economy allowed investors to look past the short-term uncertainty shock, and focus instead on the key themes defining markets over the medium term.  

Competing forces  

We see two key themes shaping the impact of President Trump on global financial markets.Firstly, global trade will be centre stage. Trump’s protectionist rhetoric was arguably one of the key reasons he won the White House and it is likely to feature heavily in his policy agenda. Key trading partners such as Canada and Mexico are most obviously vulnerable, with emerging Asia also an area of concern. Broad emerging market instruments have provided the simplest outlet for traders to express this view thus far.  That said, we see a number of reasons to believe that Trump’s positions are likely to be tempered somewhat throughout the course of his Presidency. The Republican Party has a long-established history as the pro-business voice in US politics and thus we would expect Congressional resistance to extreme anti-trade policy. Moreover, Trump’s acceptance speech gave some comfort that he may moderate his views in office as is often the case with populists throughout history. We view some of his campaign trail pledges as being effectively unimplementable and it appears likely he will take a pragmatic approach to the appointment of specialist policy advisers where required. This should provide a more diluted version of Trumpism.   

Next, we believe that the likelihood of a reflationary regime in the US has increased. Trump has pledged to implement wide-ranging fiscal measures, focused around tax cuts and infrastructure spending. With anecdotal evidence suggesting GOP (Grand Old Party, the Republicans) support for his tax proposals and cross-party consensus on the need for infrastructure, the potential for a pro-growth fiscal expansion is material. Such measures would provide a significant boost to economic growth, prompting a more hawkish stance from the Federal Reserve over the medium term. In addition, Janet Yellen’s replacement in 2018 is likely to take a less dovish stance on interest rates if Trump’s previous comments are to be believed.

Such forces would likely compound the loss of momentum in the global liquidity trades that have dominated asset markets since the advent of quantitative easing (QE). It is quite possible that Trump’s election marks the end of the 35-year bull market in bonds and puts pressure on crowded QE-related trades, such as bond proxy equities and US investment grade credit.  

A changing dynamic

On balance, we are inclined to believe that the re-emergence of the US reflation theme may be sufficient to offset the negative impacts of a more isolationist US. Nevertheless, the composition of Trump’s group of advisors and cabinet will be extremely important in validating this view. We will be paying close attention to the manner in which Trump conducts his early engagements as well as the internal dynamics shaping Congress and the wider Republican policy agenda.

In a world of few certainties, we believe that Trump’s election represents a departure from the prevailing themes of the past three decades. While globalisation and economic liberalisation have been a positive force for asset markets, many ordinary Americans have been left behind. Such a regime change is unlikely to impact the US alone. Indeed, one of the major outcomes of the 2016 US election is likely to be its spillover into populist forces globally. What is important for Western governments is the realisation that the policy agenda of recent decades has often failed to address the basic desires of a substantial proportion of their electorates.

Die Wertentwicklung in der Vergangenheit ist kein zuverlässiger Indikator für die künftige Wertentwicklung. Alle Performance-Angaben beinhalten Erträge und Kapitalgewinne bzw. -verluste, aber keine wiederkehrenden Gebühren oder sonstigen Ausgaben des Fond.

Die Informationen in diesem Artikel stellen keine Anlageberatung dar.