MarketFlash
U.S. elections
A surprisingly clear Trump victory
Donald Trump is the new President of the United States. The Republican Party retains control of
both the House and the Senate.
The majority in the Senate is slim, however, and far short of the 60 votes needed to advance legislation (i.e. to
bring a bill to the stage it is voted on). This will keep the legislation process dysfunctional (it is noteworthy, that
Congress needs to act on the government’s debt ceiling no later than in March).
What does the result mean for the U.S. and the world economy and financial markets?
U.S. economy
Ultimately, we do not expect Trump’s policies to be detrimental for the U.S. economy as a whole. There are clear
risks, however, as Trump may well misjudge or underestimate the negative impact of policy action. Protectionism
is incrementally negative (arguably though, the U.S. economy has a comparatively small export sector).
Fiscal spending (infrastructure and defense) will increase. This appears to be more of a 2018 theme, as programs
have yet to pass Congress (which is not a given). In case fiscal spending initiatives gain shape fairly soon in 2017,
bond yields (and possibly the dollar) would start to rise, as the Fed would need to tighten policy more than is
currently anticipated to prevent a rise in inflation (after all, full employment is now largely established, and
inflation and wages are modestly rising). Conversely, if spending programs were back-loaded, they may mitigate a
downturn in the economy in 2018 or 2019.
We expect limited impact for the world economy at large. A marked further weakening of the dollar would be
incrementally negative for Europe (though not current levels of the currency). Neighboring Mexico (and Canada,
to an extent) will feel some pain, depending on whether Trump repeals NAFTA (he would not need Congress to do
that) or renegotiate parts of the contract.
Financial markets
Obviously, political uncertainties are now higher. Trump is inexperienced and many of his policy intentions have
remained opaque during his campaign. It will therefore take time for the new government’s policies to gain shape.
In this process, there is more of a negative surprise potential than the other way round (as financial markets, at the
limit, most often prefer inaction).
All of this led to the expected flight to safety during the election night as a Trump victory became increasingly
likely (in particular Treasury bonds, gold and the Swiss franc gained – though the Swiss National Bank has very
probably intervened). Risk assets, notably equities, now carry a higher risk premium (we very roughly estimate
that this should be worth not more 5-7% lower equity markets). As uncertainties are likely to stay for a bit longer
than after the Brexit vote, the recovery in equity prices might be less quick but nonetheless we do not expect a
lasting negative impact on financial markets.
Equity sectors USA: We expect pharma stocks to recover, but some other healthcare sectors in the USA, notably
health insurance providers, to suffer (as “Obamacare” will probably be repealed). Domestically geared U.S.
companies (notably infrastructure and defense) should benefit. Companies sourcing abroad for products sold in the
USA may suffer (this could affect companies like Apple). Truly global companies (who source and produce
globally) should be largely unaffected (i.e. deliver a market performance). Oil and gas companies are expected to
post a modest relief rally (Hillary Clinton was in favor of renewable energies).
Investment strategy
Our allocation to risk assets has been slightly overweight. We do not see a reason to change the allocation at
present. We concede that uncertainties will remain high in the near future but economic momentum globally is on
our side and this will eventually propel risk assets higher.
9 November 2016
MarketFlash
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