Richard Buxton, head of UK equities and chief executive at Old Mutual Global Investors, offers an ‘on the ground’ perspective on Donald Trump’s victory in the US presidential election, as he is currently holidaying in the ‘solidly blue’ state of California.
“It’s official. Donald Trump becomes the 45th president of the United States. The result is a massive anti-establishment vote by the American people, and one from which, although the US media is still reeling, I felt was a distinct possibility given the rise of popular politics globally.
“If the Brexit vote taught us anything, it is don’t trust the stock market’s initial knee-jerk reaction to shock news. As I write, share prices continue to experience weakness as investors digest the implications of a Trump victory.
“But let’s not forget a vote for Trump is a big reflation trade. Trump has openly stated he will employ extensive fiscal stimulus, resulting in the likes of renewed bridge, road and rail building. All of these measures are essentially ‘pro-growth’ policies. As for his trade-mark standing up to China, ‘fair trade’ not ‘free trade’ is no bad thing in my view.
“Apart from the short-term weakness in stock markets, market watchers might start to focus on the independence of America’s central bank, the US Federal Reserve (Fed), and the position of its chair, Janet Yellen.
US Federal Reserve independence and implications for US interest rates
“Given the Trump victory, will Janet Yellen feel she has to resign her chairmanship of the US Federal Reserve? So vocal has Trump’s criticism of her been that she may feel she has to go in order to preserve the Fed’s integrity.
“Presumably vice-chair, Stanley Fischer, will step up to present stability and calm financial markets. The December interest rate rise is likely to be off, pending assessment of the economic impact of the election result, unless a supremely confident Federal Open Market Committee feels that pressing ahead with a rate rise is the best way to show its independence by rising above the cut and thrust of the political noise. Watch this space.
Implications for US dollar
“Despite current weakness, the dollar could increase in value if Trump offers US companies a tax amnesty to repatriate dollars, albeit they may already hold their overseas monies in dollars.
“Once Trump takes over the reins of the White House in January 2017, it’ll be highly unlikely he can implement even half of the proposals that have characterised his campaign trail. That said, now Republicans have retained control of Congress it may make pushing through Trump legislation somewhat easier.
“So, what will the new regime look like under President Trump? As already mentioned, medium term, Trump will be reflationary, with tax reform likely to encourage corporates to repatriate cash held overseas, infrastructure spending and no great concern about higher deficits short term.
“Against a background of pretty full employment and wage growth of 2.8%, announced last week, this should spell higher interest rates and bond yields over time,” said Buxton.