Market Bulletin (15/11/2016)
Rust Belt revolutions
In 2005, the Trumps hosted the Clintons at their wedding in Florida; last week, it was the Sunshine State which offered the first strong indication that Donald Trump might beat Hillary Clinton to the presidency. And so he did, undermining the supposed expertise of pollsters, pundits and markets alike. There were echoes of the UK’s June referendum for the man who calls himself ‘Mr Brexit’.
Voter turnout was high and, despite inflammatory comments about sex and race, Trump managed to secure a compelling victory. Low-income voters who previously voted for Obama switched allegiance to Trump in large numbers, not least in areas where companies had closed factories to shift production overseas. Donald Trump’s win was in great part a Rust Belt revolution.
The Republican Party took its largest majority since 1928 as the Party picked up the Senate, the House of Representatives and the White House. But Donald Trump is no textbook Republican.
In some policy areas, Republicans and markets alike were clearly delighted. In a move worthy of Ronald Reagan, Trump plans to take an axe to tax, cutting the top rate of income tax from 39.6% to 33% and corporation tax from 35% to 15%. His hope these moves will offer a boon to growth and investment, encouraging US companies to bring more of their operations back home, and providing an increase in both corporate profitability and the US growth rate. Investors last week appeared to offer partial agreement; the S&P 500 rose 3.7%, while the Dow Jones reached an all-time high.
Among the sectors which enjoyed a strong week was energy; Trump wants to relax environmental controls and dig for oil, gas and coal wherever possible. Banks also benefited, since he promised to repeal the 2010 Dodd-Frank Act, which increased financial sector regulation.
Rust Belt resurrection?
Moreover, Trump’s ambitious plan to spend up to $1 trillion on infrastructure, the only policy mentioned in his victory speech, responds to an urgent need that is widely recognised in Congress. (By way of anecdote, Washington DC still relies on water mains built before the Civil War of the 1860s – US infrastructure is in urgent need of investment.) It also provides an enormous opportunity for US engineering firms, whose stock prices ended the week strongly. Any measures to “re-onshore” manufacturing could (in theory at least) aid ailing US manufacturing hubs like Detroit –nostalgic hopes for a ‘rustbelt resurrection’ were one of the forces that propelled Trump to victory.
He also has major investment plans for the armed forces, having promised 42 new ships for the navy and 1,200 new warplanes for the air force; last week a number of US defence stocks rose in value.
Yet for all his classically Republican stances on defence and tax, Trump defies the Republican traditions of fiscal conservatism and of free trade economics. His tax cuts and infrastructure plans are exceptionally expensive; his immigration pledges would increase labour costs and shortages (one reason tech companies’ share prices have slipped); and his promised trade protections (such as tariffs on Mexican and Chinese imports) would raise input costs. The Peterson Institute for International Economics predicts that Trump’s policies would begin a trade war, leading to consumer shortages and the loss of 4.8 million US jobs.
Thus, while Trump’s victory has already buoyed the stock prices of many US companies, fears of inflation mean it had the opposite effect on government bonds. Last week, yields on 30-year Treasuries saw their second-sharpest rise this century. Yields on the benchmark 10-year Treasury also rose markedly (see chart). A note issued last Thursday by Nomura, a Japanese investment bank, offered a one-word summary of what Trump’s policies would mean: reflation. Others agree – and market expectations of a December rate rise at the Fed had risen by the end of the week.
“The mantra…poised to take top billing in Mr Trump’s first 100 days [is]: ‘borrow and build’,” said Payden & Rygel in a note issued last Thursday. “[Trump’s] policy cocktail implies higher rates and a steeper Treasury yield curve.”
Of course, a Trump presidency has implications that stretch far beyond US markets. For European onlookers, the announcement of Trump’s win fell on the 27th anniversary of the fall of the Berlin Wall. Yet Donald Trump’s criticisms of globalisation were a major part of his appeal to voters. He also repeatedly questioned the postwar order that the US created and maintains, and is sceptical of the US’s historic roles as leading light in NATO and as guarantor of peace in the Pacific.
Trump’s anti-internationalism therefore carries the potential to affect global markets profoundly, through deteriorating trade relations, slowing growth, and a less stable security environment. Investors will need to factor such changes into their thinking, if only to avoid overreacting.
“We expect the near term to bring bouts of elevated market volatility, as markets do not like surprises, and there remains great uncertainty on the actual policy platforms that Trump, and the majority Republicans in Congress, will seek to enact,” said Hamish Douglass of Magellan Asset Management. “Indeed, heightened market volatility in the near term will likely interplay with US monetary policy and may affect the timing of increases in the US policy interest rate.”
The US election was the driving force on global markets last week, offering a boost to stocks far and wide. The FTSEurofirst 300 and Nikkei 225 both ended up by 2.8%, while the FTSE 100 rose 0.56%.
For once, the UK was not in the headlines, but the country faces a significant few months. Attention has turned to the Autumn Statement, due on 23 November. Much of the speculation is on pension changes, and whether the Chancellor chooses to alter the tax privileges available. There is no certainty that any changes will be made, but if you are considering making an investment for your retirement and have cash to do so, then it may pay to act sooner rather than later.
As for the implications of Donald Trump’s victory for the UK, they remain uncertain. But Trump has already indicated that he looks favourably on US-UK relations and, as Capital Economics noted last week, Britain has already had its “revolution” against the establishment. Since populist movements have now successfully overturned political norms in both the UK and US, market attention has instead turned to referenda and elections in Italy, the Netherlands, France and Germany. Incumbent parties will be hoping that the ‘rustbelt revolution’ is where the anti-establishment movement crunches to a standstill.
Payden & Rygel and Magellan Asset Management are fund managers for St. James’s Place.
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