Trump victory: after initial boost, weaker growth and higher inflation likely
Donald Trump's victory in the US presidential election could lead to trade wars, with tariffs likely to rise.
9 November 2016
Congratulations to Donald Trump who has defied the odds and the naysayers to become the oldest elected president of the US.
This is an extraordinary achievement for a Washington outsider who had to beat 16 others for the Republican nomination, as well as a seasoned politician like Hillary Clinton for the presidency. Meanwhile, commiserations to Hillary for whom the election was hers to lose. And spare a thought for the opinion pollsters whose reputations lie in tatters.
Investors must now absorb the reality of a president who has promised to create 25 million jobs and build a wall across the border with Mexico.
High probability of trade wars
President Trump’s fiscal policies will cut taxes and spending, but will most likely lead to higher interest rates, inflation and a bigger budget deficit. We would expect Congress to temper the new president’s fiscal plans, while he will have more freedom on trade. Consequently, we are likely to see modest fiscal stimulus and a trade war break out as the president raises tariffs on China and Mexico.
The net effect is that after a brief boost from tax cuts, the economy will cool as inflation and interest rates rise. With higher tariffs pushing up prices and wages rising as immigrant labour supply falls, the overall outcome is likely to be stagflation, i.e. weaker growth and higher inflation.
Volatility likely as low rate environment unwinds
This is unlikely to be favourable for markets: bond yields may rise as investors seek greater compensation for inflation risk, while equity markets are expected to de-rate.
We are likely to see significant volatility as the low rate environment of recent years, which has supported equity valuations and driven the “bond proxy” stocks, unwinds dramatically.
Cuts in corporate tax rates will offset some of this and sectors such as energy and financials could benefit from reduced regulation.
More broadly, the prospect of protectionism and lower global growth will hit equity markets and risk assets worldwide. Emerging markets are particularly vulnerable given their dependence on global trade.
Safe havens in demand but dollar outlook uncertain
It is not clear how the US dollar would behave in this environment. Some see a stronger currency driven by higher yields, but as this will be accompanied by higher inflation such a conclusion is not obvious. In addition, many investors may be deterred by a deterioration in US foreign relations with the rest of the world.
The best bet is that safe haven currencies such as the Japanese yen and Swiss franc are likely to be in demand and investors are also likely to favour gold.
Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.