Investors are waiting to see just what a Trump presidency will mean for the world economy
Donald Trump’s election victory has shocked the world. While it’s tricky to know what it will mean for the US economy or world markets, long-term investors must try to work out quickly what his presidency will look like.
In the short term, markets showed a spasm of panic, but the meltdown many observers feared did not happen. In the run-up to the vote, investors had appeared spooked whenever a Trump victory looked more likely, and the immediate response to the result was a sharp drop in share prices as investors flocked to safe haven government bonds and gold.
But this was quickly reversed as investors, anticipating an increase in government spending, and a loosening of monetary policy sent yields on US Treasuries, and US share prices up steeply.
It is not immediately obvious what the longer-term implications will be
Graham Wainer, head of investments at Stonehage Fleming says: “At this early stage, and contrary to many pundits’ fears and hopes, it is not immediately obvious what the longer-term implications will be for the global economy and capital markets.”
JP Morgan Asset Management chief market strategist for Europe Stephanie Flanders says this means long-term invests should be wary of acting hastily.
Political earthquakes with profound economic consequences do not change the world overnight
“Financial markets should learn a lesson of Brexit – which is that even political earthquakes with profound economic consequences do not change the world overnight, or in a predictable fashion,” she says. “In the short term the best thing that most investors can do will be to sit tight and look for clues from Trump’s first few weeks.”
Flanders says investors should watch for three things: whether Trump builds a strong and experienced cabinet, if he continues to use the calmer tone he adopted in his acceptance speech, and if he changes his stance on the Federal Reserve.
The most reassuring statement Mr Trump could make would be that he supports the independence of the central bank
“From a market standpoint, probably the single most reassuring statement that Mr Trump could make over the next few weeks would be one saying that he supports the independence of the US central bank and he would delighted to see Janet Yellen stay as chair when her current term ends in January 2018,” says Flanders.
If Trump pursues the agenda of trade protectionism, tax cuts and spending increase promised in his campaign, the impact is likely to be increased deficits, higher US interest rates, and higher yields on government debt.
“That is not a hugely helpful combination for the rest of the global economy, especially emerging markets,” says Flanders. “But that, too, is uncertain and could take time to materialize. In the meantime, my colleagues and I are not predicting a radically different path for the US economy following this result - or for US interest rates.”
Trump’s election also highlights the growing levels of political risk in the global economy. It comes after the UK’s Brexit vote, and ahead crunch a constitutional referendum in Italy, and next year’s key elections in France and Germany.
Markets will be keen to see if the anti-establishment movement continues to gather strength in Europe
This political risk is difficult to quantify the growing uncertainty makes the job of the long-term investor harder. “Looking further into 2017, riskier asset classes will remain under pressure in response to a shifting political climate,” says Luca Paolini, chief strategist at Pictet Asset Management. “Markets will be keen to see if the anti-establishment movement that powered this political outsider to the presidency continues to gather strength in Europe.”