- Until Trump's policies are known, his rhetoric around trade, immigration and international cooperation will threaten US and global economic growth
- US markets should enter a risk-off environment marked by higher volatility and more demand for gold and Treasuries; hospital stocks could be hit hard
- Protectionism will be the biggest investment theme, particularly in Asia; we anticipate a flight to quality in Asian bonds
- European equities could ironically become a bastion of stability compared with the US; in the short-term, expect a risk-off fixed-income environment, lower yields and a flatter curve
Over the past 20 months, the United States has suffered through one of the most divisive and caustic presidential election campaigns in its history—one that has also held the full attention of governments and individuals around the world.
Now, after a long and painful slog, the results are finally known, and Donald Trump is the president-elect of the US. This is a shocking result for millions in America and beyond, and may change the standing of the US in the eyes of the world as the global reverberations sink in. One does not need to be a partisan to see how this will unfold: Based purely on what Trump has said and how he has behaved, it is clear that America's next president will try to shake up the world order. To do so, Trump will not even need to enjoy Congressional support from his own party, which he may not get anyway: As the leader of the executive branch, there is much he can do on his own to upend international relations.
As such, geopolitical risks have just gone up significantly, and the markets will almost certainly react accordingly in the short term. Perhaps even more significant for the markets, however, is the fact that Trump's victory did not occur in a vacuum. It comes during a year of surprises—remember Brexit?—that have flouted not just conventional thinking about globalization, but the entire post-war orthodoxy.
What can investors do?
For their part, investors can avoid creating challenges of their own by not making long-term decisions as the markets digest these results over the coming days; we have recently seen significant market shifts reverse themselves in 24 to 48 hours. That said, investment risks must be managed and opportunities capitalized upon, so here is our view on how the election results could affect economies, markets and investors in the coming weeks.
Trump's historic victory and his rejection of the political status quo have broad implications for the US economy. He sees the world very differently from many of his peers, and while the Republican Congress may not fully support him, he will be able to advance certain aspects of his agenda with few roadblocks.
Investors should keep three points in mind as they gauge the economic effects of a Trump win:
Trump's opposition to the political establishment, combined with a dearth of policy details, significantly accelerates event risk—at least until the markets have more clarity on where he plans to take the country. His extreme rhetoric around trade, immigration and international cooperation threatens not just US growth, but global growth as well.
Trump's presidency could be stimulative for the US economy given his proposals for corporate tax reform and infrastructure spending.
However, Trump's budget proposals could substantially increase the national debt, creating economic headwinds—and potentially higher inflation and interest rates—over the long term.
Where the world goes from here
This election has been captivating and disturbing in equal measure, raising some uncomfortable questions about the future that are still unanswered. Personality and pejoratives—not policy and purpose—have attracted much of the attention, and a deep divide separates much of America. This suggests that the country's ability to lead the world from here will be in question, although hope remains that the strength of the US Constitution will prevail and create order.
Then again, following the surprising Brexit result and the almost universal distrust in politicians and governments—which will be tested in four important elections in Europe over the next year—we believe we are watching a new theme take root. There is a significant shift in political trends underway, leading to increasing levels of risk from de-globalization, re-regulation, and government interference in markets and corporations. Rising geopolitical fears and trade tensions are set to undermine both investor confidence and corporate capital-expenditure plans, which could slow global growth even more from its already low levels.
We therefore expect our thesis of ongoing financial repression and lower-for-longer interest rates to remain valid, which will leave investors looking for acceptable risk-adjusted returns in a tougher political and macroeconomic environment. This, in turn, will continue reinforcing the need for ACTive management to keep portfolios agile in their asset allocation, confident in their underlying investment processes and thorough
in the global research and insights underlying each investment decision.