UBS: What does a Trump presidency mean for markets?

With a Republican majority in both houses of Congress, the President-elect will have some latitude to implement executive decisions that can alter the status quo of US economic and social policy. Senate Democrats will also need to defend twice as many seats as Republicans in the next election, suggesting that the Republicans have a high probability of preserving their majority for the next four years.

CIO believes that investors are well-advised to consider three broad policy areas:

1) The promise of an expansionary fiscal policy. Trump ran on a platform of tax cuts and higher public spending. He pledged to invest USD 1trn in American infrastructure over the coming decade, and reiterated his commitment in his first speech as President-elect. The fiscal stimulus provided by lower taxation and higher federal spending will have broad macroeconomic and investment implications. Military contractors and construction firms stand to benefit, for example. We also expect to see incremental pressure on wage inflation, increasing the appeal of Treasury Inflation Protected Securities (TIPS) versus other US government bonds.

2) The pledge to enact pro-business policies, reducing regulation and the tax burden. The president-elect has promised to boost economic growth by scrapping intrusive federal regulations, reducing the cost of regulatory compliance, and lowering corporate taxes. We believe the US energy sector stands to benefit from operating in a more lenient regulatory environment. The elimination of a risk premium assessed on financial services and pharmaceutical stocks should also free these sectors for better performance next year. Headline risk over drug prices will persist but government intervention is far less likely under the next administration. And companies more broadly could see their tax bill reduced as part of a larger tax reform. Pro-business legislation, lower taxes, and reduced regulation are likely to support US equities, where we already expect 8% earnings growth next year.

3) The threat to trade and immigration. Trump vowed to adopt a tougher negotiating stance with US trading partners. If this translates into policy, it could prove to be a serious economic challenge for Mexico, which relies on the US for 80% of its exports and 98% of the remittances it receives from Mexican workers abroad. CIO believes that a Trump presidency will create some volatility. However, while the shift may pose challenges for some trade-focused emerging nations – such as Mexico, South Korea and Colombia – countries with larger domestic economies like Brazil and India should be less vulnerable. Added to this, US relations with Russia may improve, given indications of mutual respect between Vladimir Putin and Trump. Barring radical policy development, we believe the economic and earnings revival now underway in most emerging markets (EM) can continue. We are overweight EM equities and select EM currencies.

Authors: Mark Haefele, Global Chief Investment Officer Wealth Management and Mike Ryan, Chief Investment Strategist, WM Americas

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