US Election Impact

Now that the US Election has concluded, we received a concise summary from K2 Asset Management during the week that resonated…..

The main positives that we see for the US equity market from the Trump victory are as follows:united-states-presidential-election-2016-eligibility-to-run-for-us-presidential-election-method-of-electing-united-state-president-vice-president-2

  • The ability to implement policy change via having control of both the House of Representatives and Senate.
  • Lower personal and corporate taxes foreshadowed.
  • A reduction of corporate regulation and a generally less hostile approach to Wall Street and the banking sector.
  • An increase in disposable incomes which will underpin the outlook for the retail, motor vehicle and housing sectors.
  • The unwinding of Obamacare.
  • Hostilities with Russia should subside.
  • Allowing US companies to repatriate foreign held deposits and profits without tax penalties.
  • US Fiscal policy easing will underpin US economic growth.
  • Rebuilding US infrastructure will provide stimulus to the US economy and will likely boost commodity prices.
  • A fundamentally stronger US economy will have a positive impact on global growth, although Trump’s policies will attempt to keep more of the benefits within the US than what has been the case in previous cycles.
  • These major US reforms will make US equities even more relatively attractive than Europe or Japan where reform is yet to be embraced.
  • We assume that the USD strengthens against the JPY and Euro, given the factors listed above.

The negatives that we see from the Trump victory:

  • Given Trump’s policy of cutting taxes and rebuilding infrastructure, in the short term, the budget deficit is likely to be higher and therefore both short term and long term US interest rates will be higher. (In the long run, these policies are likely to improve the budget position.)
  • Uncertainty in relation to foreign policy will be higher.
  • The discount rate will be higher in the short term.
  • US Trade protection may hurt the global economy and emerging markets. (Although, we assume Trump will be more of a gradualist on this front than his rhetoric suggests.)
  • Higher US interest rates, stronger US economic growth, higher demand for USD’s and repatriation of USD’s by US multinational all argue for a stronger USD. This may hurt US multinational profits from a pure translation basis.
  • Specific sectors in the US may suffer from Trump’s policy changes, such as the private hospital/clean energy/interest rate sensitive sectors.

Trump’s victory and the UK Brexit decision are a global reflection of a tilt to the right on politics, especially regarding the economy, immigration and the rule of law. Trump’s victory will place more pressure on Europe, Japan, Emerging economies and Australia to move on reform. In terms of global policy settings we see a switch away from unconventional monetary policy easing to easier fiscal policy, especially on the infrastructure front. The era of low-interest rates is over.

Joel Xuereb