Tackling Trump

What does a Trump victory mean for your investments?

View from Killik & Co’s research team post US Election result.

Today Donald Trump has been elected the 45th President of the United States and the Republicans also look set to control the House and the Senate. Overnight, as the results came in, investors turned their eyes to the reaction in financial markets. As was the case following the Brexit result, the immediate impact has been a great deal of volatility, and after a sharp move lower in equity indices, many have significantly pared their losses. Meanwhile perceived ‘safe havens’ such as core government bonds, the Japanese yen and gold which rose earlier, have now pulled back from those highs.

Paul Killik recently wrote in The Telegraph, and our client magazine Confidant, about the ‘herd effect’ that took hold of many investors after the UK’s vote to depart the EU and the importance for retail investors to not panic in times of volatility and to resist trying to time the market. We counsel all clients and investors to take heed of the same advice today and to try to consider the impact that a Trump victory could have over the medium term.

Interest Rates

We believe the prospect of an interest rate rise in December has diminished given the increased policy uncertainty, and that a change in Fed leadership has perhaps also become more likely. Trump has been critical of the Federal Reserve and there have been suggestions that Janet Yellen could leave her post as the central bank’s Chair in the event of a Trump victory.

US Treasuries

Trump has promised to increase fiscal spending on infrastructure, education and defence, amongst other things, and such reflationary policies, should they come to fruition, could weigh on Treasuries, particularly at the longer-end. We could therefore, if interest rates are to remain low for longer, see the yield curve steepen.

The US dollar

Although the dollar weakened amid uncertainty about future US trade and foreign policy and as the likelihood of the Fed raising rates in December has receded, it could strengthen medium term if the proposed fiscal policies bolster growth and inflation, and if US multinationals are encouraged to repatriate their foreign earnings.

Impact on Equity Markets

The equity market impact may be mixed as many of Trump’s policies remain unclear, however, in general we see them as being more capital friendly, rather than labour friendly, and hence beneficial to equity owners. With Republican control of Congress, there may be tax reform, such as lowering the corporate tax rate and introducing a low-rate tax holiday on the repatriation of foreign earnings. An increase in infrastructure and defence spending may benefit US construction and defence stocks respectively, while healthcare stocks are rallying as the threat of Clinton’s control on drug pricing has gone. Trump’s opposition to various trade agreements and his support of protectionist policies could impact some non-US companies that derive a significant portion of their earnings from the States. There has been a lot said in the build-up to the election, but detail has been thin and it remains to be seen how much of the pre-election rhetoric results in firm policies.

As with Brexit, it is times like these where diversification is particularly important. It remains difficult to call currency moves and short-term asset price swings, but a diversified portfolio, both by asset class and geography, along with a long term view should help to cushion the impact of heightened volatility.

We encourage you to contact your Investment Manager if you would like to discuss any of this further. Or alternatively, if you are new to Killik and would like to learn more about our investment approach contact us on 0207 3370777 or info@killik.com.