Trump’s agenda of deregulation and lower taxes is pro-business and, in the nearer term, we expect smaller cap and value stocks to be favoured.
The Republican sweep in the US election could have wide-reaching implications for stock markets, currencies, commodities, and foreign countries. In the long run, Trump’s agenda of deregulation and lower taxes is pro-business and, in the nearer term, we expect smaller cap and value stocks to be favoured.
However, we should not expect a smooth ride. Trump’s ‘America First’ policies could increase global trade tensions, especially with China and potentially the EU. Moreover, the fiscal deficit, policy unpredictability and his geopolitical stance on Russia and the Middle East could have a major impact on energy markets, military spending and traditional alliances.
Regardless of the potential impacts of the election result, it’s worth noting that the impact of the state is often exaggerated. The US economy is a large machine that marches relentlessly forwards by people and businesses making individual decisions, regardless of who resides in the White House.
It’s also worth remembering that the economy appears to be resilient. The latest earnings season has surpassed expectations so far, and it is notable that the positive surprises have been broad-based. We also expect the earnings growth gap between the so-called ‘Magnificent Seven’ and the rest to start to close, supporting a broadening out of the market, which for a diversified portfolio of companies with attractive fundamentals should be positive.
Elsewhere, the Beijing government’s monetary and fiscal pronouncements suggest that policymakers are finally trying to get a grip on the liquidity, banking and real estate crises that have engulfed its economy. More specific policies are needed (and expected) to kickstart the economy and if successful, companies with Chinese exposure could benefit, notwithstanding the concern over the potential for trade tensions.
Europe remains a concern. The economy looks sluggish and, in contrast to the US, the regulatory environment is a relative headwind for the region. The political environment also looks increasingly uncertain, especially after the collapse of the German government, which could drive volatility. We expect that earnings resilience, high quality management and a global footprint will be characteristics that will likely be favoured.
Our ethos of diversification ensures that portfolio risks are controlled with exposure to a broad range of sectors and themes across the style spectrum. We believe this approach will be important in negotiating a market that is likely to be more volatile.
In the nearer term, the new regime should lead to deregulation and an easing of banking rules that would be favourable for the Financials sector. Trump’s promise to “drill, baby drill” should lead to some energy projects being fast-tracked and regulatory barriers lowered, benefitting the Energy sector.
A Republican-controlled US government is also likely to take more of a hands-off approach with technology. However, trade tensions with China could impact tech companies relying on international supply chains. We continue to remain positive on artificial intelligence (AI), however, which offers exceptional growth. Further down the AI value chain, exposure to data centres within Real Estate and Industrials provides attractive indirect exposure.
