Trump has triumphed. We are not surprised. Back at the end of September we said that the prospect of Trump being elected was greater than any of the pundits were hoping and that on one analysis he was within 6 votes of winning, out of a total of 538 in the Electoral College. The bookies and the financial markets were then still betting on a Clinton win but it would only take two key states such as Pennsylvania or Colorado to go to Trump, to set up financial markets for a shock similar to the Brexit vote in June.
• Along with other risks that we have pointed to, we have indicated that there should be underweight positions in Australian and International equities as well as property securities, holding overweight in cash that can be strategically redeployed into equities, at better prices, in due course.
• Trump has won the US presidential election and the equity markets have reacted adversely, at least during the first day as the count took place. The Trump victory was built on a strategy of being a disruptor and not accepting the rules of the game as politics is practiced in the USA. Donald Trump is to politics as Steve Jobs was to the music industry and Sergei Brin, Larry Page and Mark Zuckerberg have been to the advertising industry. They have not played by the accepted rules and they have appealed directly to customers.
• This resonated directly with the target market of millions of middle and working class people who have not shared in the growth in wealth and income that has flowed from the economic and monetary policies of the last thirty years.
• In his direct appeals to voters Trump has been light on policy detail but has said that he will:
o Cut corporate taxes
o Spend big on infrastructure
o Renegotiate foreign trade arrangements
• If Trump carries through with just these, there will be many winners and many losers. He is likely to carry through with the help of a Republican party that controls both houses of Congress. The medium term consequences are likely to include:
o Bigger Federal deficits over the next four to six years and much more issuance of US long term bonds leading to yields being higher than they would otherwise be.
o Faster economic growth and higher inflation.
o Faster growth in earnings per share of US domestically oriented companies.
o Slower growth in world trade with adverse impacts on countries such as China and eventually Australia as well as on earnings growth of multinational firms including those based in the USA. Exports from China to the USA represent 20% of Chinese exports and 4% of Chinese GDP. A reduction in trade would be significant but not devastating to China, although it would exacerbate its already difficult task of avoiding a hard landing as it seeks to reorient its economy.
o China may seek to offset the effects of any global trade slowdown via increased infrastructure spending that in turn may boost iron ore and coal prices.
• In the shorter term the impact of having an apparently erratic and idiosyncratic leader of the USA may well disturb financial markets in general and equity markets in particular. The potential for equity markets to weaken has been well demonstrated in recent weeks with the mere prospect of Trump being elected. The reaction so far to his actual election was at first even more pronounced but has since stabilised. Volatility may well continue for some days or weeks. Given the more positive medium term prospects in some areas, any shorter run declines may eventually prove to be an opportunity to accumulate equities at better than usual prices, albeit on a selective basis.
• Central banks are likely to slow any planned rate increases, especially the US Federal Reserve. This may extend for a longer period providing added support to equity prices for longer than was expected just a few days ago.
• Equity markets could fall by up to 10% in the next week or so purely to compensate for the higher risks and uncertainty now extant in world markets. We have already seen markets off by 5% since the possibility of Trump winning became seriously contemplated. The short-term downside risks may now be modest, but we could not rule out a more extended decline over the next month by up to 15% to 20%.
• In summary we must be watchful and patient in coming weeks but not lose sight of an emerging opportunity to redeploy cash into equities at what may be favourable prices given a change in the medium term outlook.
• We also need to consider potential shifts in stocks (or funds that invest in stocks). These would include:
o Shifts away from large cap multinationals and emerging market companies that are dependent on exports and towards small and mid-cap domestically focused stocks in developed markets.
o Shifts away from long term bonds and companies that are sensitive to bond yield increases such as REITs, utilities and even infrastructure stocks holding existing infrastructure assets rather than the new ones that may be built.