November 2016

Trump, the political novice, has beaten expectations and taken the White House.  His win represents another victory for those in the West disenfranchised with globalisation – elements of which are also evident in Europe.  Despite expectations, after an initial shock in the early hours, markets are behaving relatively calmly as they wait for further indications of Trump’s planned presidential style.  Political risks in general tend to be overdone as there are usually a lot of unknowns.  We are trying to focus on the areas we have conviction in.  While there has been some volatility in currencies and equities, the gold price – generally an indicator of stress – is only up a little.

It is important to remember that the current president-elect will likely be held in check by the same Congress that has made Obama’s presidency a difficult one.  We are also waiting for the appointment of key government positions in the coming months; this will help to clarify the expected policy positioning following the pre-election rhetoric.  Trump’s lack of consistency on policy has been a problem for anyone trying to predict the effects of his victory.  We are trying to assess longer-term impacts where there has been greater consistency of message.

We expect inflation to rise over the next few years and see a possible short-term boost to US economic growth.  Curbs on immigration and free trade should lead to higher inflation as a result of rising wages and costs of imported goods.  Proposed cuts to personal and corporate income taxes could provide a near-term boost to growth as consumption makes up around 70% of the US economy.  Foreign policy may shift but we think it is likely that some of Trump’s bombast will be reeled in by advisors with a better understanding of the global implications.

More generally, the election result, following fairly swiftly on the heels of the UK referendum, suggests that globalisation may have peaked for the time being.  This is perhaps a more important long-term impact for the world and could result in continued slower growth and higher inflation.  A move in this direction should benefit a range of our views across asset classes.  We are broadly defensively positioned in equities and have some exposure to UK inflation-linked bonds, both of which should outperform in an environment of rising inflation.