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Nov 10, 2016

Investment houses say business as usual following Trump election

No need to panic, note investment experts

The election of Donald Trump as US president has left top investment houses undisturbed, with more of a business-as-usual approach being taken – albeit with some cautionary comments on specific economic issues.    

Tom Stevenson, investment director at Fidelity International, notes that if investment professionals ‘stand back from the noise’ of the election campaign, ‘the correlations between stock market performance and the presidential cycle are fairly random. Markets are driven by the fundamentals of economic growth, innovation and company profits.’

He asserts the solid position of the US economy: ‘In the US, unemployment stands at a historically low level, corporate earnings are reasonably buoyant, the housing market is secure and the country maintains its lead in many of the areas of the most attractive areas of the market – innovation-fuelled sectors like technology, for example. The global economy is showing signs of life and America is almost certain to be in the vanguard of that trend.’

Mark Sherlock, lead portfolio manager for US small and mid-caps at Hermes, says that for markets it is likely Trump’s presidency will begin with a period of increased volatility as investors separate real policies from pre-election rhetoric, but ultimately the picture is reasonably positive.

‘Trump is unabashedly pro-business, and the American political system has numerous checks and balances that should prevent him from enacting any of his ill-considered policy initiatives,’ he says. ‘The US has long been a great place to do business and it seems unlikely that any one individual – even the president – will materially change this.’

David Kelly, chief global strategist and head of global market insights strategy at JPMorgan Asset Management, also notes that the US economy President Trump inherits is in pretty good shape, with real economic growth having picked up in recent months and the unemployment rate – at 4.9 percent – close to any economist’s definition of full employment.

He further highlights that S&P 500 earnings have rebounded from the oil and dollar induced slump of 2015 and that inflation is still moderate. Moreover, he points to the global economy showing signs of life with the global manufacturing purchasing managers’ index hitting a two-year high in October. ‘All of this, absent political uncertainty, would be positive for stocks and negative for bonds,’ says Kelly.

He adds a possible issue with inflation: ‘While the Trump agenda is unlikely to be implemented in full, members of Congress may be willing to go along with some proposals to increase spending, lower taxes, reduce illegal immigration and increase tariffs. If they do so, they may well further stoke inflation in an economy that is already heating up.’

In the long run, and in a more cautionary note, Kelly observes that investors would do well to make sure they are well diversified outside of US stocks and bonds and that they have sufficient exposure to alternatives and international securities.

In a statement, BlackRock warns about Trump’s threat to withdraw from, or renegotiate, trade deals, as well as his labeling China as a currency manipulator: ‘This raises the specter of retaliatory protectionist moves by other nations. Any such tensions, coupled with general uncertainty over the Trump administration’s goals, would likely initially result in ‘risk-off’ sentiment hitting stocks and corporate bonds – and a flight to perceived safety havens such as gold and the yen.’

Not everyone is spooked, though. ‘No one knows how the president-elect’s campaign rhetoric will translate into real policy and how effectively that policy can be implemented by America’s dysfunctional political system, which has always tended to limit the ambitions of reforming presidents,’ Stevenson notes.

Putting the election in a more historical perspective, with the victor being Republican, he adds: ‘The US stock market has tended to perform significantly more strongly under a Democratic president than it has under a Republican. Since 1929, Democratic presidencies have delivered annualized stock market returns of 14.7 percent versus 5.4 percent for Republican administrations.’