Global uncertainty to remain as election result signals further rolling back of globalisation themes, with emerging markets likely to see greatest impact.
For the US, the Republican sweep in both houses will facilitate Trump’s agenda with a focus on domestic growth, spending and fiscal stimulus.
The US public has rejected the establishment and for the first time a businessman with little political experience has won the presidential election. The US markets are not yet open but already we have seen Asian markets fall from the highs of the previous day when Clinton was expected to win. These markets have not however reached the lows of earlier this year. The main immediate impact will be visible in the emerging markets. Indeed we have already seen the Peso fall and the Mexican central bank call an emergency meeting. The last time the Mexican peso experienced such a fall the Mexican central bank intervened and hiked interest rates, so we could see the announcement of a rate increase later today. While the dollar is up against emerging market currencies it has given back much of its past gains against the Euro and Yen.
We expect the impact of the result on equity markets to be mixed, with an initial short-term hit as the world adjusts to the perceived increase in geopolitical and economic risk. China will be a particular concern given Trump’s rhetoric regarding trade and tariffs. Europe will remain highly fragile as further elections play out and may continue the anti-globalisation theme.
For the US domestic economy, the obvious winners are infrastructure, with a focus on roads, bridges, airports and sectors that would benefit from M&A and industry consolidation, which Trump is particularly enthusiastic about. Financials will benefit from loosening of the Dodd-Frank regulations, while the defence sector is likely to thrive. Other sectors likely to do well include consumer discretionary, consumer staples, telecoms, energy and mining.
We expect fiscal easing to come through in the shape of tax cuts, targeted in particular at low-spending consumers, and an increase in defence spending. Given the likely increase in budget deficits, we expect a steeper bond yield curve; additionally, Trump has made some disconcerting comments regarding a lack of commitment to debt repayments.
Trade protectionism is perhaps the biggest economic fear, as we could see reflationary outcomes. Expectations of inflation in the US have already turned and protectionism will accentuate those fears. Ultimately, monetary policy uncertainty, protectionism and fiscal easing are not a recipe for lower rates and should reverse course.
More broadly, this result will have profound implications that will take time to understand, including for example the role of the US within international institutions such as NATO, the IMF and the United Nations.
The US electorate has voted for change, but it's worth remembering that Trump's stated policies have been somewhat thin and we are unsure which of his pre-election announcements will result in firm policy-making. More will emerge over the coming weeks, but in the meantime markets are likely to remain volatile as they deal with the ongoing uncertainty.