The polls were tight, but there was very little expectation of a Trump Presidency and the Republicans both retaining control of the House of Representatives and commanding the Senate. But beyond the knee-jerk reaction, what does this mean for markets and for individual sectors?
Potential for fiscal stimulus
Given the unknowns that come with a new US President that has never previously held elected office, we can expect global business confidence, already fragile and reeling post the surprise decision by the UK to vote to leave the European Union, to be damaged further. It is hard to argue that risks to global growth are anything but to the downside. However with a Republican stranglehold in the Capitol, Trump’s much-vaunted intention to invest aggressively in domestic infrastructure will likely act as significant fiscal stimulus to the US economy, albeit with a likely lag. With the US stock market amongst the most highly valued globally, we would expect to see a de-rating, with growth stocks probably hit the hardest.
By sector, we see the obvious beneficiaries as being those exposed to infrastructure expenditure – so selected industrial and technology companies. President-elect Donald Trump has vowed to do away with ‘Obamacare’; this is clearly negative for large sections of the healthcare sector, though for the pharmaceutical sector, the Clinton-based pricing overhang will be removed and we should expect stocks to rally accordingly. Trump’s disdain for the environment has been much discussed; we expect to see energy stocks rallying.
But as a global investor, the implications for the broader world are clearly very significant too. Most US presidents start by focusing on the domestic agenda on which they have been elected, but Trump has been elected – and now has a mandate – to shrink America’s influence and impact upon the world.
Potential tailwinds for select EMs
With the dollar weaker, the safe haven yen is stronger – and a higher yen is bad for Japan. But a weaker dollar is a useful tailwind for emerging market (EM) equities – an asset class that we continue to focus upon, given the benefit of lower valuations and, in some cases (though not for Mexico), relatively attractive prospects for growth regardless of the trajectory of the US economy.
However, in a year of political surprises with populism to the fore, every global investor’s attention will inevitably turn to Europe. Perhaps we will see modest fiscal expansion with European Central Bank-related stimulus in place to counter the short-term impacts of a slower US economy, but the focus will swing pretty quickly to the upcoming Italian referendum, the French Presidential elections in April, and the elections in Germany due next Autumn. At what price will some further anti-establishment success, and with it heightened risks to the already fragile growth outlook, be for Continental Europe?
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The information in this article does not qualify as an investment recommendation.
For professional investors only. Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
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