As the world awaits the inauguration of the 45th President of the United States later today, Geir Lode, Head of Global Equities at Hermes Investment Management, discusses what investors have learnt about Donald Trump’s plans since his surprise election in November.
Ahead of the US elections, many investors viewed a Trump victory negatively and markets reacted accordingly, falling sharply in the immediate aftermath of the result. Trump was viewed as a challenge to the world order, a threat to the system that many investors had expected to continue in perpetuity. However it took mere hours for the sentiment to shift as investors began to anticipate a fiscal splurge, with pro-growth policies and a business-first stance viewed as beneficial for the earnings of US companies. The optimism has extended beyond investors, with US consumer sentiment also reacting favourably to the new President-elect.
It is easy to understand why investor optimism has surged following Trump’s victory. The dawn of ‘Trumponomics’ promises a wave of infrastructure spending and tax cuts and the proposed fiscal splurge will accelerate the cycle. Trump has repeatedly shown his commitment to US business interests, and if his proposed corporate tax restructuring proceeds as promised the implications are huge. The potential for a “border tax” is already influencing decision making in the boardroom of major US companies.
We believed banks were attractive prior to election, given low valuations and the upward pressure on rates. Trumponomics has provided a further catalyst and higher rates will improve margins in core banking services and lead to stronger earnings. Furthermore, the recent rally of US banks also reflects the hope that the Republicans will cut red tape around regulations allowing banks to release greater amounts of capital or increase levels of lending. Firms such as Bank of America, with healthy capital ratios, could see their return on equity rise from 6% to 8 or 9%. In July last year, we built a bigger position in US banks whilst reducing our exposure to insurance names.
In December consumer sentiment in the US reached its highest level in almost 13 years. Trump’s victory has brought a feeling of optimism to large parts of the US with promises of more employment and lower taxes. However consumer confidence has been rising for several years, and while it is undoubtedly true that elections and Presidents can change sentiment short-term, their actual impact on the economy and the labour market is much more muted than political commentators pretend.
GDP and equity markets move in long cycles, and while the policies of the government have huge influence, they do so over a long time horizon and it can be many years before the true impact of many policies is understood. The long term impact of Trump’s promises appear to be a rapid increase in the deficit, and while we continue to hear many ways of spending money, Trump’s campaign provided much less clarity on how the costs will be met. President-elect Trump seems no more willing to address this issue.
An unconventional approach
Trump broke all the rules on his way to winning the White House and many remain surprised that he continues to defy the expectations of a US President. He still refuses to disclose his tax returns, and faces allegations of conflicts of interest despite taking steps to distance himself from control of his businesses. He remains active on Twitter and his choice of content and language shows no sign of moderation, ranging from ill-advised and inelegant to diplomatically dangerous. He has shown no restraint in publicly airing grievances, targeting those companies whose actions go against his vision for corporate America and shaming them back into line.
In the corporate space this has worked wonders thus far, with Boeing promising to lower the cost of Air Force One and a string of companies seeking to appease the President-elect by committing investment in the US. Yet longer term we remain sceptical that social media will be the best vehicle for negotiation and suggest that some issues require more than 140 characters (even if they are capitalised). Trump’s policies seem likely to risk a trade war and his indelicate approach to negotiation does nothing to suggest this can be avoided. Those commentators who expected Trump’s advisors to moderate his outlook have so far been proven wrong.
Trump rose to power promising to bring change to Washington, and while some of his cabinet selections are atypical, on the whole it does not appear that he has followed through on the “Drain the Swamp” rhetoric. With senior appointments for executives from Goldman Sachs and ExxonMobil, Trump’s focus on business has been further highlighted, but his critics would argue that this sort of cronyism is exactly what they expected, regardless of his campaign promises.
Above all, Trump’s actions since the election have been entirely in keeping with his election campaign, and his cabinet picks have done nothing to suggest a softening of his opinions. We believe companies in the US will enjoy favourable conditions in the short-term, but we remain concerned that at any moment a stray tweet may cause markets to plummet or diplomatic relations to sour.