Trump election victory: the view from our equities teams
Matt Ward, Fund Manager, US Equities
Donald Trump won 279 electoral votes and 47.5% of the popular vote to emerge as the surprise victor of Tuesday's US presidential election. Republicans have also maintained majorities in the House and the Senate - a unified Republican government not seen since 2006. Relative to expectations, Trump’s performance seems to be based on greater support of the white, non-college educated vote as well as lower turnout by urban constituents.
Areas of greatest impact for the economy are increased fiscal spending, an issue with clear bipartisan support and the more negative uncertainty associated with Trump’s trade policy. On fiscal policy, we think through a combination of tax cuts and infrastructure/defence spending, Trump’s articulated policy has the potential to add nearly 75bps to GDP. While Trump’s ability to pass fiscal legislation is facilitated by Republican control of Congress, it is important to point out passage of any major legislation will require support of nearly all Republicans in Senate. This is a Congress that has historically resisted deficit spending, and it is always difficult to extrapolate actual policy from campaign rhetoric in advance of any President coming to office.
On international trade, we perceive greater uncertainty as a result of Trump’s ability to unilaterally act on tariffs without Congressional approval. This is far ranging as withdrawals from trade agreements like North Atlantic Free Trade Agreement (NAFTA) or as tactical as his much-talked about China tariffs.
From a pure sector standpoint, there are two highlights which have been addressed by media but based upon today’s market action not yet fully discounted.
First, the benefit to industrials and defence companies associated with increased fiscal spend on infrastructure. Second, the negative impact on healthcare service, hospital, and device companies attributable to the potential repeal of the Affordable Care Act. Additionally, there seems to be some relief in drug pricing legislation that will benefit pharma and biotech companies in light of Clinton’s failed bid.
While lack of certainty is always a negative for markets, growth and policy will ultimately determine the market's path. That won’t be in focus until the market gets a more detailed articulation of the Trump vision, his appointments/staffing, all beginning January 20th at the earliest. We continue to believe that baseline US GDP will grow at a 2% pace (excluding potential Trump stimulus) in 2017 as a function of a robust consumer, two-thirds of the US economy.
Consumer resilience is evident in sustained jobs growth, the recent inflection in wages, improved balance sheets, and homes that are worth more. While greater uncertainty and volatility associated with a more unknown quantity entering the White House and the potential for reduced global trade could detract from today’s growth trajectory, additional fiscal stimulus is additive.
It is important to note, while many of Trump’s fiscal initiatives and pro-business policies are additive to US economic growth, higher inflation, interest rates, and a stronger dollar are important offsets that we must continue to monitor. Already, inflation has inflected on sustained full employment but we feel very comfortable with the Federal Reserve’s (Fed) ability to address this in what has proven to be a more modest growth environment anyway. Today, odds of a Fed move in December are up to 80%.
Alex Tedder, Head and CIO of Global and US Equities
Repeal of prior policies implemented by President Obama will probably focus on sectors such as healthcare and energy that had struggled given the prospect of a Clinton victory. Healthcare reform will involve the repeal of Obamacare and re-instatement of market-driven pricing for drugs and healthcare services. Energy policy will move away from climate change initiatives and focus on domestic energy security. There will undoubtedly be many opportunities in the US as a result of policy changes.
However, in aggregate, greater risk probably feeds in to structurally higher risk premia across markets and sectors, suggesting pressure on equity market valuations. This is likely to remain the predominant theme until we see the practical implications for forward-looking growth.
The result, whilst unexpected, will not result in significant sector or geographic change across our global equity portfolios. Our portfolios were intentionally broadly diversified by sector and region, with stock positions anchored around those names with attractive and resilient fundamentals. The Trump-victory will however introduce stock-specific opportunities given initial share price and currency movements relative to our fundamentally-based expectations.
Rory Bateman, Head of UK and European Equities
The initial, sizeable sell-off in European equities quickly reversed this morning as investors re-appraised the repercussions of the Trump victory. The equity risk premium around US equities is likely to increase given the policy uncertainties but this will be offset to some extent by a clear victory for the Republicans and a relief that the whole election process is over. European equities will be impacted by sentiment, but we believe there will be a very limited impact especially given current attractive valuations and the recovery potential for corporate Europe.
Inevitably some European companies will be affected but the lack of detail around specific policies during Trump’s campaign means it’s very difficult to draw many conclusions. Thematically, greater US protectionism in order “to make America great again” is likely to benefit international companies with US-based operations, while companies exporting to the US may find increased trade barriers going forward.
At the sector level pharmaceuticals have been weak on the assumption of a Clinton presidency and possible drug price controls. That recent weakness is likely to reverse particularly given the Republican clean sweep although we should emphasise Trump’s healthcare policy comments have been extremely limited. The key Republican/Trump priority will be to repeal and replace Obamacare which is negative for service providers, particularly US hospitals and as such it’s difficult to deduce very much for European companies.
Fiscal expansion driven by infrastructure spend has been a key issue for Trump so US-exposed construction and concessions businesses are well-placed, but again there are minimal opportunities from a European perspective.
Our sense is that short-term interest rates continue to move higher given fiscal stimulus and tax cuts. US dollar strength in the short term is probable which is positive for banks and many US-based financials e.g. the life insurance companies. The caveat is that longer-term concerns around the deficit and inflation may well undermine dollar strength over the longer term.
This is undoubtedly a very memorable occasion in US history and the outcome was unexpected by most market participants but the impact on equity markets is unlikely to be that significant, particularly in Europe. Trump is a maverick politician but it’s not obvious that his background or disclosed policies to date are that detrimental to equities. We will of course be looking for opportunities that may arise should there be excessive volatility but fears of a significant correction at this point are overdone in our view.
Tom Wilson, Head of Emerging Market Equities
The ramifications of the US presidential result are an unknown. The election campaign was light on policy and the extent to which campaign statements materialise in policy implementation will clearly be key. Until we have greater clarity, elevated investor uncertainty is likely to lead to market volatility.
Trump’s protectionist standpoint, for example, is a potential negative for global trade and therefore emerging markets. The degree of implementation and any follow up response from other countries, however, can lead to a variety of outcomes. From a market perspective, negative effects may also be outweighed by policy response, whether from the US or elsewhere. So in short, it is too early to say how events will unfold and there is therefore no basis for a fundamental change to our view.
The positioning of our portfolio is broadly neutral to global market events with no bias towards the future direction of the US dollar or Federal Reserve policy. Consequently, we do not expect a significant impact on our portfolio’s relative performance. As long-term fundamental investors, we do not follow a trading mentality and did not make any investments directly on the back of the election outcome. We will monitor events closely and seek to opportunistically benefit from any market, currency or stock overreaction as future US policy materialises.
Asian ex-Japan equities team
As equity investors that focus on longer term fundamentals and bottom-up stock selection, the outcome of this election will have no immediate implications on our outlook or strategy. We may, on a selective basis, use any unfounded weakness at the stock level to add to preferred names where we have longer-term conviction on these businesses and their fundamentals.
We will continue to observe developments following the outcome of the elections and where there might be impact to Asian companies and exporters for example in specific sectors like pharmaceuticals, where drug pricing may be come under tightened regulations, or IT services where immigration policies may be changed. We remain focused on businesses that can differentiate themselves and are beneficiaries of more structural themes including trends in demographics, innovation and disruption.
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