Donald Trump’s election as President of the United States (US) on 8 November 2016 sparked a brief but substantial sell-off in risk assets, however these losses were predominantly recovered within two trading days. In the period that has followed, we have seen developed equity markets strengthen, with notable sector rotation within equities. The US dollar has also strengthened while US bonds have weakened with yields rising significantly in the long end of the curve.

While there are still many areas of uncertainty at this point, and surprises during the coming months are likely, we are seeing some regions, sectors and currencies benefiting more than others. As there are many scenarios that could play out, this paper focuses on the useful framework considered by Shane Oliver, Head of Investment Strategy and Chief Economist, which is: will President Trump emerge as a pragmatist or a populist in driving policy in the US?

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President Trump the populist: Policies are likely to be nationalistic, appeal to the right, favour protectionism and pose a high risk of trade wars.

President Trump the pragmatist: Policies are likely to be more aligned to traditional Republican party views, rhetoric is probably more subdued than during the campaign period.

This paper draws on the insights of AMP Capital’s investment teams to assess the potential market and portfolio implications of Trump as US President over the medium term.

Key points

  • Irrespective of whether populism or pragmatism prevails in the White House, we are likely to see business tax cuts and personal income tax cuts, large scale infrastructure spending and defence spending. These policies are supportive of continued economic growth in the US and have the potential to be inflationary.
  • It remains unclear what types of reforms will be proposed for the healthcare and finance sectors. Immigration and trade policy changes are also unclear at this point.
  • US longer-dated bond yields have increased due to higher expected inflation and higher real yields. Given the limited spare capacity of the US economy and the signs of emergent wage pressure, a large fiscal boost is likely to be offset by Federal Reserve interest rate hikes and a stronger US dollar.
  • While President-elect Trump is supportive of increased infrastructure spending, he has not proposed any strategy for funding that spending. For direct infrastructure investments, it is likely that rhetoric from Trump will encourage more deal flow in the sector. However, we will need to closely monitor any issues relating to foreign ownership of assets.
  • Across direct property, US and Australian portfolios were already positioning for the eventual rise in interest rates, with a bias towards defensive assets with strong cash flows to offset the risk of heightened market volatility.
  • President-elect Trump is regarded as a climate change sceptic. He is pro-fossil fuel production and favours reducing regulations on fossil fuel energy production and infrastructure so this should be positive for the energy infrastructure sector. For global listed infrastructure, a populist President Trump might weigh on general equities while a pragmatic President Trump is likely to be supportive.
  • A greater focus on infrastructure spending is universally positive for most real estate assets located in the regions of increased infrastructure development.
  • Financial stocks, biotechnology and pharmaceuticals, and industrial socks, especially those with exposure to infrastructure and construction, are set to benefit from Trump’s victory.
  • Emerging markets and Asian equities have suffered under the weight of a strong rally in the US dollar in anticipation of strong growth under the Trump administration.
  • Our approach to managing global equities is to focus on the long run and to seek to profitably exploit the long-term industry and geographic shifts that are structural in nature and less sensitive to macroeconomic uncertainties and policies.

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