2016 and before
Schroders Live US election special: Our experts debate the implications
The impact for the economy, interest rates and stockmarkets as discussed by Chief Economist Keith Wade and fund managers Alex Tedder and Marcus Brookes.
Global markets failed to react as anticipated in the immediate wake of the unexpected election of the Republican Party’s nominee Donald Trump as the next US president. Despite some initial volatility, the reaction since has been more measured than many had forecast.
The possible longer-term implications of the new administration remain unclear. Amid many unanswered questions, Schroders Live – US Election Special brought together a panel of experts to hear their thoughts on the key issues.
Alex Tedder, Head and CIO of Global and US Equities, Schroders’ Chief Economist and Strategist Keith Wade and Marcus Brookes, Head of Multi-Manager, contributed to a wide-ranging discussion chaired by journalist Anna Edwards. Among many issues touched upon, the panellists debated how the result might impact the US economy, global trade, central bank policy as well as equity, bond, currency and commodity markets.
“People generally have started to think about what has actually changed, from an economic standpoint, arguably from a market standpoint and then what does Trump actually mean for the economy and for markets,” said Tedder. “I think people are starting to realise there are some good things, potentially, in his programme.”
All the panellists noted there remained uncertainty as to how many of Trump’s policy initiatives would be followed through on. Despite the party winning full control of Congress, they believed the Democrats could still frustrate any plans, while the Republican Party itself is divided on some issues.
“Most of the analysis which was done before the election suggests his policies will have a big impact on the economy,” said Wade. “Tax cuts, but big spending cuts, protectionism, cutting back on migration. The general consensus from that analysis is that it will probably result in a boost to growth in the short run but further out probably result in slower growth and higher inflation.”
Brookes noted how Treasury bonds had initially rallied, but at the time of the discussion “three or four hours after the result and [yields] are now 10 basis points higher”. He attributed the steepening of the yield curve to rising inflation expectations as some of Trump’s policies could result in a “deficit of around $2-6 trillion over the next decade, which is very big, and to a lot of people could cause the inflation we have all been worrying about.”
Wade agreed with this analysis, adding that the potential for tariffs on Chinese imports might exacerbate any inflationary pressures. Whether such price rises are sustainable would then depend on wage growth accelerating in response. Trump’s mooted immigration policy, he noted, might further tighten an already strong labour market.
The Federal Reserve (Fed) is still likely to increase base rates at its December meeting, forecast Wade, but he suggested rates may then be held. He raised the prospect of stagflation as “growth is weak”, but he said that would “take care of inflation further out”. While none of the panellists expected the country’s new leader to remove Fed chair Janet Yellen, they noted he’ll be able to influence board appointments – Brookes said “monetary policy could come under the direction of the government more than we’re used to”.
The discussion then moved onto the possible sector implications of a Trump-led administration, with pharmaceuticals, banking and infrastructure all examined.
Tedder noted that Hillary Clinton would have targeted the pharmaceuticals sector, however he still expects to see “ongoing pressure on drug pricing”. Wade believes the implications for banks could be positive – a Democrat-led administration would have resulted in more regulations, he said, whereas an inflationary environment and steepening of the yield curve may boost earnings. Brookes said Trump could go one step further and repeal existing financial regulations.
Wade said the “real hope” of an increase in infrastructure spending would be to improve the productivity of the US economy. Up until now, low productivity has meant strong labour market growth has not followed through into economic growth.
The panellists discussed the potential implications of a Trump presidency for the rest of the world, again it was a mixture of possible positives and negatives. Wade noted the knock-on impact of the impending referendum in Italy and the forthcoming Dutch, French and German general elections. “People are not happy with the way the economy is performing and the way the growth is divided up,” he noted, drawing parallels with the UK’s decision to leave the European Union.
There were mixed views on the potential knock-on impacts for emerging markets. Tedder noted the risks, but believed the underlying structural drivers of growth – including strong domestic demand – would remain intact. Wade raised the prospect of worsening relations between China and the US, and any negative consequences for global trade, which would especially “hit emerging markets, particularly Asia”. He flagged potential implications for Chinese holdings of Treasury bonds.
For the wider Americas, the outcome could be more mixed. Whereas Mexico may be hit “quite badly”, said Wade, higher commodity prices, amid anticipated dollar weakness, might be a positive for some Latin American countries.