Whitechurch Asset Views - November 2016
The advent of ‘Trumponomics’
It is of course the political backdrop in the United States that dominates our investment thinking this month. It has been nearly a week since Donald Trump’s victory in the US election, and financial markets have been trying to get to grips with what this all means for the economic and investment outlook.
Trump’s very vocal views on increasing fiscal spending is weighing on bond markets the most at present. Massive infrastructure spend is the cornerstone of ‘Trumponomics’, and it appears that Trump is adamant about seeing this policy through when he becomes President next year. The infrastructure spend is seen as being inflationary as its intention is to boost US economic growth. Inflation is the enemy of bonds and with markets being forward thinking, bond markets are reacting adversely to the potential for this reflationary move.
The increased risk of higher inflation means that the consensus view remains in place for a US interest rate hike in December. Potential for higher inflation and interest rate increases lead to a stronger dollar and all of this is bad news for Emerging Market debt and currencies. Capital has been sucked from these areas due to higher bond yields in the US proving more attractive.
The prospect of ‘Trumponomics’ is also seeing mixed reactions across equity markets. Quality growth companies and traditionally defensive areas of the stockmarket have reacted badly to the news as these areas are viewed as bond proxies. Contrary to this more cyclically focused businesses and value stocks have outperformed based on the fact they would benefit far more from strong, infrastructure driven, US growth. It has led investors to question whether this is the much vaunted inflection point for value that has been predicted in recent years? This is a crucial question but it seems a little premature to make such a call at the moment.
One key area of ‘Trumponomics’ is around protectionism. Trump has stated that he wants to renegotiate trade deals, not least to apply swingeing tariffs on all Chinese imports. Of course, this could well be toned down when he eventually gets into office but the Asia Pacific and Emerging Markets bourses are now currently reacting unfavourably to Trump’s victory and what this could mean to global free trade.
Ultimately, it is too early yet to understand what the wider impact of ‘Trumponomics’ means for investors. It looks like fiscal policy is to take up the baton for global growth as there are signs that monetary policy stimulus has run its course. With the Brexit vote and Trump’s surprise victory, politics has been a major influence on financial markets. With the Italian constitutional referendum next month and European elections in the Netherlands, France and Germany next year, it is likely that politics will continue to be an influence going forwards.