Michael Penn (pictured) is senior vice president at Cohen & Steers and macro strategist responsible for providing economic analysis and forecasts to Cohen & Steers’ investment committees.
The spike in Treasury yields after Trump’s stunning upset in the US presidential race says that investors believe his policies may lead to higher inflation and stronger growth. That’s generally positive for real assets, but there’s a lot we won’t know until we see what he actually does. Until then, we expect uncertainty to drive more volatility.
- With Republicans in control of the White House and Congress, we see increased chances of an infrastructure push, lower tax rates, tax reform and less regulation.
- These pro-growth policies, which should result in higher inflation, strengthen our confidence in an already positive backdrop for real assets.
- However, policy uncertainties may result in higher volatility until there is more clarity about what Trump will actually do.
Assessing Trump’s pro-growth agenda
We see three main areas where there are likely to be meaningful economic policy differences in a Trump government compared with what we’ve experienced over the past eight years:
- Fiscal policy—Trump has promised a significant increase in fiscal spending, concentrated in rebuilding America’s infrastructure.
- Tax reform—Wide-ranging tax cuts are on the agenda, including lowering the corporate tax rate from 35% to 15%, incentives to repatriate foreign earnings and lower tax rates for high-income earners. Less regulation has also been a focus, which could lead to improved business confidence.
- Trade and immigration—Protectionist rhetoric suggests potential for lower levels of immigration and more trade restrictions.
At the moment, there is little clarity on which objectives Trump will carry forward, or how much Congressional Republicans will be aligned with his agenda, particularly on trade. In the longer term, we believe increased infrastructure spending, tax cuts, less regulation and a more pro-business attitude could be very positive for the economy.
The clean sweep by Republicans of the Presidency, Senate and House increases the chances of policy being enacted quickly. This suggests a shift to a pro-growth mindset for the government, in our view, driving increased inflation and pushing interest rates higher. This would be an inflection after the deflationary forces of globalisation seen over the past 20 years.
The 10% rise in the 10-year Treasury yield in the day after Trump’s win indicates that markets are already bracing for an environment of higher inflation and higher growth. We believe this backdrop would likely impact markets in different ways:
- Negative for fixed income due to higher interest rates
- Positive for real assets, as long as higher inflation is accompanied by stronger growth
- For equities, it depends how strong inflationary trends are—a lurch toward protectionism could be quite negative for stocks (and also bonds), whereas a pro-growth, pro-inflation environment would likely benefit cyclical assets
- Broadly, higher interest rates are generally positive for savers and financial institutions, which could offset some tightening of financial conditions
Below, Cohen & Steers investment teams offer their perspectives on the potential impact of Trump policies.
Real estate securities
US: Our US portfolios are positioned for modestly higher interest rates and growth. The Trump win confirms our view in this direction. However, our cyclical stance has moderated amid signs of slowing fundamentals in growth oriented sectors such as self-storage, apartments, offices and hotels. More confidence in the growth outlook would likely lead us to pivot back into more-cyclical assets.
The correction in US REITs since July has made valuations more attractive, in our view, with many REITs trading at discounts to the value of their property holdings. Considering the unusually high correlations to bond yields in recent months, REIT prices may still overshoot before finding a base and moving higher. If REITs continue to move down on concerns of rising yields, we see a potential buying opportunity emerging given the prospect for improving growth. Historically, REITs have performed well amid accelerating economic growth, even in the face of higher interest rates and higher inflation.
Canada: It is still unclear—despite talk of tearing up NAFTA (North American Free Trade Agreement)—whether renegotiations would target just Mexico, or also Canada. Supply chains for vehicles and oil (the largest trade sectors between the US and Canada) are integrated across the border and have been so for decades, meaning that free trade with Canada will likely continue for most industries even if NAFTA goes away. At the same time, we believe stronger growth in the US, higher oil prices and increased support for cross-border energy trade could benefit Canada’s economy.