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D. Trump President ... What's next?

 

 

2016-10-Trump vs Clinton: investment challenges and strategies

Analysis and

Market impact

The elections have delivered their verdict, and against all odds, D. J. Trump (Republican) will be the 45th president of the United States.

He will take office on 20th January 2017.

His vice president will be Michael Richard Pence. Elected with more than 59 million votes (48%), the new president had to gather 270 delegates to enter the White House. He has obtained a minimum of 279 delegates.

But for success to be complete, it was also necessary to take control of Congress to be able to carry out the electoral program. Before yesterday's vote, Republicans controlled the House of Representatives (246 seats out of 435) and the Senate (54 seats out of 100).

 

Publication

D. Trump President ... What's next?

D. Trump est élu président des Etats-Unis : quelles conséquences à court et moyen terme?

 

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”

 

 

Scenario

Scenario #2

 

Trump "Lite" Plan

Scenario #3

 

Trump "Full" Plan

 

Comment

Trump goes to Washington to negotiate his measures and is forced to give up part of his plan. His final proposals are more realistic and more neutral on deficits

Implementation of all (or nearly all) of his intentions

 

Probability

90%

10%

 

Impact on the US economy

Slight positive impact on US growth in the mid-term. The US avoids a recession.

Global growth and US growth would both be driven downward. Expect a recession.

 

Impact on deficits

Moderate impact given the inevitable concessions to Congress.

The impact on public debt would depend on the measures ultimately retained, but should be neutral overall, as it is for Hillary Clinton's plan.

A serious impact in Trump's case, given the scope of the tax measures and the initial negative impact on growth

Ultimately, at a 10-year horizon, the aggregate impact on the budget would be $5.3 trillion in the Trump plan1.

 

Impact on the global economy

Little impact on global growth. It could stay around 3%

Global growth would probably move toward 2% (or even below)

 

Impact on global trade

Trade friction between countries would be limited; no damage to global trade.

Expect strong trade friction between the relevant countries (US, China, and Mexico) and major damage to global trade. Pursuit of de-globalisation inevitable.

 

Impact on inflation

Higher inflation with, eventually, slightly stronger growth?

Higher import prices given tariff measures, and impact on the overall price level.

 

Impact on the labour market

Rising nationalism against lobbying of industries currently benefiting from cheaper immigrant labour. The debate will not go away after these elections.

Rising nationalism against lobbying of industries currently benefiting from cheaper immigrant labour.

 

Impact on volatility of exchange rates and equities

Significant increase, at least initially.

Major increase in volatility.

 

Impact on monetary policy

No rise in Fed funds in December. The Fed fund tightening cycle resumes in 2017.

No rise in Fed funds in December. The Fed would interrupt its monetary tightening by observing the negative impact on growth. A QE4 would no doubt be considered by the financial markets later.

 

Impact on the bond market

US Bonds as safe haven first, but an increase in long-term rates later, with the expectation of higher deficits.

Sharp increase in long-term rates, with the expectation of higher deficits. Next, the negative impact on growth would cause the Fed to become more accommodative, which would weigh heavily on long-term rates.

 

Impact on the US Dollar

In the short term, positive for the USD notably against the Mexican peso. Negative against the major currencies.

The impact on the dollar would no doubt be positive in the short and medium term if fiscal expansion plans are not blocked and/or the repatriation of benefits takes off. Completion of the Keystone XL oil pipeline, blocked by Barack Obama, should weigh down oil prices and push the dollar upward.

In the short term, positive for the USD notably against the Mexican peso. Negative against the major currencies.

The impact on the dollar would no doubt be positive in the short and medium term if fiscal expansion plans are not blocked and/or the repatriation of benefits takes off. Completion of the Keystone XL oil pipeline, blocked by Barack Obama, would likely drag down oil prices and push the dollar upward. Less of a positive impact in the long term, especially if the United States' financial position worsens dramatically and the Fed returns to a QE policy.

 

Impact on US corporate bonds

Negative initial reaction from the credit markets. Underperformance of high-beta segments.

Watch for sensitivity of the US economy to an increase in interest rates and bond yields.

Corporate indebtedness is nearing all-time highs.

Businesses having production units in Mexico are exposed to the currency risk and the dollar's appreciation.

Negative initial reaction from the credit markets. Underperformance of high-beta segments.

Watch for the US economy to be highly sensitive to an increase in rates. Corporate indebtedness is nearing historic highs.

Significant increase in default rates.

 

Impact on US equities

The financial markets will probably respond unfavorably, at least initially, given the greater uncertainty and risk aversion

Sectoral views: even after negotiations with Congress, infrastructure sectors would nonetheless be likely to benefit from the spending increase. The oversold Health sector could also come out on top. Do not count on "international" strategies but instead on purely domestic strategies and small cap equities.

The financial markets will probably respond unfavorably, at least initially, given the greater uncertainty and risk aversion

Sectorial views: defense and infrastructure sectors would nonetheless be likely to benefit from the spending increase. The oversold Health sector could come out on top. Do not count on "international" strategies but instead on purely domestic US strategies.

 

Impact on gold

A price increase, at least initially.

A price increase. A safe asset  in a period of economic, geopolitical, and financial stress.

 

Impact on EMGs

Weakened at first by the general uncertainty (customs duties, American diplomacy, global growth, global trade) and by the rise in risk aversion. Due to Trump's opinions on Russia, Russian assets and RUB may be better preserved if US sanctions are lifted.

Weakened by the increase in protectionist measures and by risk aversion. Because of Trump's intentions and their proximity to the US, Mexico and China will be the most affected nations in terms of trade. Expect a significant depreciation of the RMB, with major consequences on the global financial markets. Due to Trump's opinions on Russia, Russian assets and RUB may be the big winners if US sanctions against Russia are lifted

 

Impact on Europe

Weakened first of all by growing fears of a return to US protectionism and risk aversion. Later on, Europe should benefit from "light" program (no tariffs, no damage on world trade, renewed strength of EMG ...).

Weakened by the increase in protectionist measures and by risk aversion. US long-term rates are bringing European long-term rates moderately upward.

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).

Conclusion

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).

 

Global Positioning

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.

Pascal Blanqué,

Vincent Mortier,

CIO , Deputy Chief Executive Officer, Global Head of Institutional Business, Group Chief Investment Office - Amundi

Deputy CIO, Global Head of Multi-Asset - Amundi

BOROWSKI Didier , Head of Macroeconomic Research
ITHURBIDE Philippe , Global Head of Research
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D. Trump President ... What's next?
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