Read our previous article “ TRUMP vs CLINTON: investment challenges and strategies ", October 2016”
Following the elections, they retain their majority in Congress:
- The renewal of all seats in the House of Representatives gave a Republican majority (237 Democrats seats).
- The renewal of all seats in the Senate also gave a Republican majority. It was also about to renew 34 seats in the Senate (including 24 held by Republicans), and the Republicans gained control (51 Seats).
- Note also the new electoral map: on one hand, some States traditionally Democrats went into the camp of the Republicans (Florida ...), and on the other hand, the vote of minorities, including Hispanics, were much less favorable to Democrats than expected. As the UK for Brexit , there is also a generational cleavage and cleavage between cities and countryside. This vote is also in line with the general increase of populism, a fact that is found in more and more countries - regions – continents.
With a Republican House of Representatives and Senate, D. Trump should be able, in theory, to implement his program. In practice, he will nevertheless have to convince his party of the interest and the need to build a wall between Mexico and the United States, to stem more than 11 million migrants living in the US, to renegotiate trade agreements ratified by the United States, to establish prohibitive tariffs against some countries, such as China or Mexico. It seems highly improbable he will succeed and it also seems very difficult to get Congressional approval for a sharp deterioration in budget deficits, even temporarily (i.e. Trump’s proposal). However, it is reasonable to focus on the implementation of all or part of its infrastructure program, tax cuts, but probably a little more targeted towards the less favored classes. But beware: the measures mentioned above (which will most likely be adopted) are fairly good medium on long term to the economic activity. However, in the event of implementation of its entire program - which is highly unlikely, it would rely on a shortterm recession.
Recall some key elements (for a detailed analysis and quantification of the D. Trump program, refer to our previous article “ TRUMP vs CLINTON: investment challenges and strategies ", October 2016”
1] This is the CRFB's static estimate, not including the effects of measures on the economy and interest rates (and their second-round impact on public finances).
It is too early to assess the economic impact of this election. The power is disseminated between the President and the Congress and we must not underestimate the political importance of congressional Republicans. They will certainly try to amend or mitigate part of the Trump’s proposals.
Beyond the impact on growth and on the financial markets, this election will have important consequences for the country. The course of B. Sanders and more D. Trump have indeed highlighted the expectations of many voters, Democrats as Republicans, for the development of new policies, certainly opposing ideological inspirations, but generally less liberal that previously, to address the discontent of the middle class to the effects seen as undesirable : globalization and rising inequalities. This will weigh on US policy offer but also that of other countries (we think of the upcoming elections in Europe).
The context of uncertainty created by the US elections had led us, over the last few weeks, to maintain - even to strengthen - in our diversified portfolios, some protections, essentially through long positions of volatility and 10-30 years US Treasuries for significant quanta, and to a lesser extent a diversification on gold. We had besides implemented an underweight position in US Equities (on valuation consideration) as well as in the banking sector.
Concerning the rates, we framed our portfolio management within this careful approach: risk in duration globally neutralized over the last few weeks, partial reduction of spreads bets, diversification on inflation indexed bonds and no strong position as for the evolution of the parity EUR / USD. Our risk budget consumptions therefore stood out relatively moderated before the election.
The election of Donald Trump, considered as highly improbable a few weeks ago, contributes to uncertainties which should be found in the valuation of the various US assets as well as the emerging assets. However, the new President’s room for maneuver will be very framed and of the impact of its actions will become limited. At this stage we maintain mainly unchanged our allocations. The inevitable period of volatility which will open the next few weeks will certainly offer interesting opportunities of investment but will also ask for a strong discipline in terms of levels of entrance and exit valuation. The correlation between assets will also need to be closely watched.
In the same way, a consensus stands out within our bond management teams on the fact that a victory of Trump can activate a renewal of volatility on the risky assets, at least in the short-term. In longer term, the real impact on the market remains less clear because it will depend on an economic policy which outlines remain to be defined. In cases where a scenario of "fly to quality" is initiated, the cash (defensive) or long-maturity loans (yield) positions of the US Treasury remain an option of investment, mainly for the US investors but also for the international investors. Indeed, US Treasuries can play the role of a “macro-hedge” in diversified portfolios. This environment comforts our hypothesis of long lasting low rates and the need to find additional diversification sources.
On the equity markets side, this election brings us to consider three important points. On the one hand, the lack of clarity regarding the implementation of the program, the influence of Congress and Senate, and the management of the international relations will generate some volatility. We thus continue to consider that it is necessary to be exposed to this parameter. On the other hand, as during Brexit, the political events and deadlines will translate at first into fluctuations on the foreign exchange market, this risk must be therefore mastered. Finally, during this election, we had seen at least a point of convergence between both candidates, that of an increase of the public spending, in infrastructures in particular, it then consolidates our will of exposure in this sector, in the United States as in most of the other countries, the cycle of budgetary reflation being at work after a relative austerity.