The meaning of Donald Trump
At a glance
A different tone
Given the unique nature of Donald Trump’s US presidential election campaign, it was always going to be a challenge to set out a detailed policy road map for his administration. Since his election, however, there are some clearer indicators to the direction President Trump will go and what this will mean for investors.
The market reaction to President Trump has been extremely positive. The S&P 500, Dow Jones Industrial Average, Nasdaq Composite and Russell 2000 of small capitalization stocks have all hit highs since November 8. The US stock market has seemingly channeled the angry support Trump relied upon, becoming an extension of his ‘America First’ message.
Those that have gained have been the model of Middle America: shares of smaller companies, which largely focus on domestic customers and the dollar itself. ‘The strong dollar speaks to the strength of the US economy and rising price pressures before Trump’s stimulus,’ observes Marc Chandler at Brown Brothers Harriman in New York. Losers since the election have been large multinationals that, under the Trump narrative, take jobs away from honest Americans and pay less tax.
Is this a sign of things to come? In an assessment of the current outlook from investment companies and brokers, there are interlinked themes that ‘Trumponomics’ can be marked against:
• a more active fiscal policy with tax reforms and infrastructure spending
• a new limit on free trade and an embrace of protectionism
• tighter immigration control
• lighter-touch regulation
• a new focus on energy.
The end of fiscal restraint
Trump has promised a fiscal boost to the economy from wider tax cuts and infrastructure spending. He pledged to invest $1 tn in American infrastructure over the coming decade, and reiterated his commitment in his first speech as president-elect.
Ben Snider, senior US equity strategist at Goldman Sachs, says the issue of tax changes is the main topic of questions from clients. On a wider macroeconomic level, Mark Sherlock, lead portfolio manager for US small and mid-cap at Hermes, says: ‘His proposed cuts to personal and corporate tax rates will help the economy in the short term, but the specter of his increasingly protectionist policy agenda may undermine the US economy in the longer term.’
Jim Caron, global fixed-income portfolio manager at Morgan Stanley Investment Management, says any US corporate tax reform, based on Trump’s proposals, should increase corporate profits and margins. ‘Tax reform is the swing factor that could turn bearish economic outlooks into more bullish ones,’ he says. ‘Sectors that stand to win most, in our opinion, are healthcare and financials, due to a roll-back of regulations and policy threats.’
The fiscal stimulus provided by lower taxation and higher federal spending will have broad macroeconomic and investment implications, says Mark Haefele, wealth management global CIO at UBS. ‘Military contractors and construction firms stand to benefit,’ he observes. ‘We also expect to see incremental pressure on wage inflation, increasing the appeal of Treasury Inflation-Protected Securities versus other US government bonds.’
Lighter regulation and macroeconomics
The president has also promised to boost economic growth by scrapping invasive federal regulations, reducing the cost of regulatory compliance and lowering corporate taxes. ‘We believe the US energy sector stands to benefit from operating in a more lenient regulatory environment,’ Haefele continues.
‘The elimination of a risk premium assessed on financial services and pharmaceutical stocks should also free these sectors for better performance next year. Pro-business legislation, lower taxes and reduced regulation are likely to support US equities, where we already expect 8 percent earnings growth next year.’
Not everyone agrees, however. Neil Williams, group chief economist at Hermes, says Trump’s macroeconomic plans are likely to lead to slower growth and provide a weaker footing for an economy that may have to weather some subsequent distress to asset prices: higher money rates and weaker equities. ‘He advocates tax cuts skewed toward higher earners, yet reductions to immigration and trade,’ Williams notes, arguing this could lead to ‘a hit to tax revenue of about $4 tn (22 percent of GDP) over five years, which would be only part-financed by spending cuts.’
Tightening immigration flows were central to Trump’s campaign but could limit an important avenue for growth, notes Jim Glassman, head economist for commercial banking at JPMorgan Chase. ‘The American workforce is growing more slowly than in previous generations, and importing new workers is a straightforward way to offset demographic decline,’ he points out.
Williams says Trump’s anti-immigration threats would only accelerate the US’ shrinking labor supply, which is still close to a 36-year low, and cut potential growth. ‘This may spur wage growth, but the inflation that protectionism spawns will likely be the wrong sort: cost-push, rather than demand-pull,’ he explains. ‘In that case, the Fed will have to turn a blind eye.’
Protectionism, not free trade
Antagonism toward free-trade treaties was a hallmark of Trump’s presidential campaign, as he took a protectionist stance against new trade deals, including the Trans-Pacific Partnership. And the president appears committed to his protectionist approach with the appointment of Robert Lighthizer, a longtime advocate of greater protectionism, as his US trade representative. But Glassman says: ‘A trade-friendly Congress is unlikely to endorse Trump’s more extreme promises, such as ripping up Nafta.’
At the same time, Dr David Kelly, chief global strategist and head of global market insights strategy at JPMorgan Chase, observes: ‘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.’
On energy, Trump has been a reliable supporter of hydrocarbons. America’s coal industry may get a lifeline if environmental regulations are suspended and older plants are allowed to remain in operation without expensive retrofits. Oil and gas producers can likely look forward to less stringent environmental rules, quicker approval for new pipelines and a more favorable permit process for exploration on public lands.
‘But the impact of these measures could be underwhelming: rising natural gas production will likely continue to erode coal’s price advantage, and the global oil glut has already made drilling in most American shale fields unprofitable at current prices,’ Glassman points out. ‘Funding for clean energy research may be cut, but cutting existing subsidies for wind farms could be a political risk for a politician who has promised to bring jobs to rural areas.’
Trump the man
All these views are based on expectations of what Trump is likely to do. Andrew Sheets, chief cross-asset strategist at Morgan Stanley, offers an insightful interpretation of the meaning of Trump the man: ‘Many have told us they believe that, while he said some extreme things on the campaign trail, he is ultimately a moderate, pragmatic businessman, a dealmaker who will delegate policy to experts, lead with market-friendly, almost Keynesian, fiscal stimulus and, ultimately, avoid a big fight on trade.’ Many hope this is indeed the case.
Another positive outlook, not necessarily on Trump but on the reality of American economics and politics, is espoused by Tom Stevenson, investment director at Fidelity International, who says two factors contribute to a more upbeat perspective. First is the US economic position.
‘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 most attractive areas of the market – innovation-fueled sectors like technology, for example,’ Stevenson says. ‘The global economy is showing signs of life and America is almost certain to be in the vanguard of that trend.’
Second is the importance of market fundamentals. ‘Before the election, I argued that it might not matter too much who has the keys to the White House – and that’s because in the long run, markets tend not to be too swayed by which party a president stands for,’ Stevenson says.
‘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.’
Trump will give world economy a boost
Nikko Asset Management’s global investment committee (GIC) thinks US President Donald Trump will deliver a boost to the global economy. ‘Although the surprising Trump victory carries many uncertainties, the net effect for global economic growth and corporate profits has clearly improved,’ explains the company’s chief global strategist and GIC chairman John Vail. ‘This justifies an overweight stance on global equities, particularly for the US and the developed Pacific ex-Japan region.’
Although there is uncertainty about how Trump will deliver, the GIC believes his goal is clear: to spur investment and create new jobs in the US through lower corporate taxes and decreased regulation. The committee is forecasting that the S&P 500 index will close the first half of 2017 at 2,478, up 10 percent from its current level, before rising to 2,533 by December 2017.
Both European and Japanese equities are expected to perform well in local currency terms, backed by strong US and global growth, but their gains are likely to be limited in US dollar terms. As for currencies, the GIC is bullish on the US dollar against the yen and the euro, taking the view that the Fed will adopt a more hawkish stance. The committee forecasts the Fed will raise interest rates in each of the first three quarters of 2017, as the central bank normalizes policy.
Macro implications of a Trump presidency: A view from Hermes Investment Management
Inflation/Treasury Inflation-Protected Securities
This article appeared in the spring 2017 issue of IR Magazine