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CIO Spotlight: Response to US Election 2016

12 November 2016  08:28 GMT    Gary Reynolds


We asked Gary six questions regarding the US Election and the impact of Trump's presidency on global markets, interest rates, the UK following Brexit and how Europe and the wider world might respond.

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What’s Going On?

Voters that feel disenfranchised by globalisation and the traditional political parties have chosen leaders that they believe understand their frustrations.

Effect on Interest Rates

If the UK & US governments embark on a programme of fiscal stimulus, including infrastructure spending, which is likely, inflation and interest rates will rise.

Implications for Investments of a Trump Presidency

Trump is a businessman and will want to protect the value of his own properties, therefore, he won’t want to do anything that will seriously harm the American economy.

Impact on UK Following Brexit

A Republican victory is very positive for the UK’s Brexit negotiations because Trump sympathises with Brexit and will take a tougher stance with Europe.

Effect on Globalisation, Free Trade and GDP Growth

Trump is bad for free trade. He opposes lots of free trade agreements and this will be detrimental to the level of worldwide growth.

Was Such Change Inevitable and is it Due?

The Trump victory could change the outcome of the Brexit negotiations and EU policies on border controls.

* AFD is a newly-formed German Euro-sceptic, anti-immigration party that is opposed to nearly all the policies of Angela Merkel’s Christian Democrats. Ronald Gläser, an AFD member recently elected to Berlin’s regional parliament, once described Winston Churchill as a “war criminal” responsible for 50 million deaths.

Video Transcript

What’s Going On?

Apart from most of the UK being quite shocked by the outcome of the presidential election, I think what we’re all having to do is reassess our view of politics, and for quite a while we’ve believed that globalism has been a force for good - as it has been. There’s no question that free trade enables economies to develop, and as they develop third world countries in particular benefit from having access to more markets and it pulls hundreds of millions of their population out of poverty.

What I think we’ve all missed is that it disenfranchises certain elements of society. Those that are in less skilled jobs find their pay driven down because immigrants coming into the country will take those jobs and perform them well for lower salaries, and therefore you have to a certain level, no real increase in earnings in the UK and the US. The message that the electorate have sent to the establishment in June this year with the Brexit referendum and now with the presidential election, is that they’re not happy. And those politicians that have been able to tap into the discontent have been successful, like Farage and Trump, and that’s going to send a big message to all the established political parties in Europe as they face their own elections in the next year. In France in 2017 and in Germany in 2017. For us as asset managers, what we’ve got to deal with is the worst possible type of risk; political risk – because it’s extraordinarily unpredictable. So I’m expecting things to be very very turbulent for the next few months.

Effect on Interest Rates

Trump’s success has caused immediate volatility in the markets. Equity prices sold off around 5% as soon as it became clear that he was likely to beat Hillary Clinton to the White House. Then when Trump started speaking and when people recovered their thoughts, the markets picked up. I think we’re going to see a lot of volatility, but I don’t think necessarily we’re going to see a huge hit to business earnings in the States or elsewhere. They’ve been under a little bit of pressure recently, they’ve not been growing as much as they have in the past but they’re reasonable, and fundamentals are reasonable.

What Trump did say is that he’s going to push money into infrastructure. Now that’s clever, because getting money into infrastructure can divert a lot attention away from the promises he made that he will not be able to fulfil. Like the wall between the US and Mexico – it’s not going to happen. But other infrastructure projects are sensible and it’s a fact that America’s infrastructure is creaking – as it is in the UK. So I think what we may start to see in the next year is a change in monetary policy, i.e. keeping interest rates down, and central banks buying up bonds to keep the long interest rate down - this comes to an end, in terms of its ability to make changes. We see governments both sides of the Atlantic - and Teresa May has hinted at this – going back to fiscal policy. In other words, we stop being monetarist in our policies and we go back to good old Keynes, who says that when your economy’s flat, do something – anything – to get it going again. And as it’s cheap to borrow at the moment and we do need improvements in infrastructure, and the Americans need it, it makes sense for governments to take on these projects. However, bearing in mind that unemployment is already quite low; in the UK below 5%, in the US below 5%, in Germany below 5%, there’s not significant amounts of spare capacity. So if the governments start to increase demand for goods and services because of their own activities in boosting infrastructure, then it’s likely to prove inflationary. And I think in two or three years’ time we may look back to 2016 as the end of the bull market in bonds, and that interest rates may go up much quicker than anybody could ever anticipate, which tends to be the end of bull markets. They don’t just whimper out – they slow down and then they end very quickly. If that’s the case, then holders of long dated bonds, either treasuries or gilts, may get burnt quite nastily within the next six months or so. We are very mindful of that, which is why we’ve been holding shorter dated bonds, which will not be so affected if interest rates jump up suddenly.

Implications for Investments of a Trump Presidency

The intelligentsia both sides of the Atlantic, which regard themselves as liberal democrats, are horrified at the prospect of President Trump leading their country for four years. I’ve been asked, what will the effects of the Trump presidency be on asset prices? Well, let’s remind everybody that Donald Trump is a businessman that owns lots of properties, and property prices don’t do very well if the economy is torpedoed. Donald Trump as a businessman, consistent with the way he’s run his life, will look after his own interests first, you can be absolutely certain of that. So I doubt that President Trump is going to do anything to sink the US economy and certainly nothing that will cause his own property values to decline.

That is what Adam Smith would call the “Invisible Hand”. In other words, it’s the desire - the will - to serve your own self-interest, and in doing so you serve the interests of society as a whole. Let’s just hope that Adam Smith’s Invisible Hand philosophy is as true today as it was 250 years ago, because if it’s not, then we may be in a bit of trouble.

Impact on UK Following Brexit

When the UK voted to exit the EU, we took a path that was not in accord with US policy, because Obama wanted to work with Britain in the EU and was very pro Britain remaining. Donald Trump has actually built his case on a similar basis, populism, as the Brexit campaign has built their case. So, this has changed the potential relationship between the UK and America dramatically because with Trump’s victory, the UK and America are suddenly on the same page.

Effect on Globalisation, Free Trade and GDP Growth

Globalisation is likely to suffer under Trump because he has promised to protect the jobs of lots and lots of low paid workers in the US. Now, if he allows lower cost imports into the country, which displace workers at businesses that make the same or similar goods but for slightly more cost, then he’s going to renege on the promise he made to – and let’s be blunt about it – white working class America. White working class America has put President Trump in the White House for a reason.

Now, I think there are some promises that Trump will not be able to renege on and that’s one of them. And he’s got to at least look like he’s pushing back against the effects of globalisation which is not good for world trade, not good for competition, and not good for productivity and GDP (Gross Domestic Product) growth in the immediate future.

There are other promises that he made that I think he will renege on. I don’t think that he’s got any chance whatsoever of convincing the Mexican government to build his wall, so he probably just won’t talk about that now. But there are some things that he will have to do. As a businessman, he will tend to serve his own interests. I don’t see that Trump is going to be a force for cooperation with other countries to further develop free trade and globalisation. I think he will be the exact opposite, so the only question I think we’ve got to ask is, how bad will those effects be? And we’re not going to know that until we get to the end of the first term of his presidency.

Was Such Change Inevitable and is it Due?

Populist parties have been picking up votes for a while now. Now, you can’t call the Republicans a populist party but you can call Trump a populist politician. He switched from Democrat to Republican and sort of just picked the party that he could espouse his own views and actually, ironically, he’s given the Republicans the type of landslide victory that they only dreamed of.

The reason the populist politicians are doing so well is because there’s a sense of unease amongst ordinary members of the electorate and the thing they are most hacked off about is immigration. The Americans are fearful of immigration because it costs jobs and they’re worried about terrorism. The French are worried about immigration for the same reasons. The Germans are worried about immigration. The Brits are worried about immigration. The Danes are worried about immigration. Everybody’s worried about immigration except the politicians in the centrist parties, and they’ve been given a bloody nose by the electorate.

Now what is going to be really interesting is to see how the effect of Trump’s victory takes place in France and Germany, who have got their own elections coming up. Can the French, centralist traditional parties, stem the growth of popularity for Marine Le Pen’s National Front? Can the AFD, Alternative für Deutschland, or Alternative for Germany, which is against virtually every policy of Angela Merkel, be stopped by the Christian Democrats? That’s the fighting ground for the next six months, but what the politicians can’t do is ignore the voice of the people. Now, immigration has been nowhere near as much of a disaster for any countries as some people think. But the ones that have been affected, the people that have lost jobs in lower skilled positions, are hacked off and they have found a voice. They’ve found a voice in the UK, they’ve found a voice in the States, they’re finding a voice in France, they’re finding a voice in Germany, and the question is, what is going to happen next? Now, one thing ironically that could be very beneficial, is that it makes the British negotiation on Brexit a little easier, because what Britain may find is that countries in Europe are more receptive to a deal that has free trade at its centre, but allows Britain to control its own borders. Because the European politicians may find that however much they are wedded to free movement of workers, they can’t deliver it and stay in office. Given a choice of watering down some of those policies or letting Le Pen or AFD – extreme right-wing parties - make ground, may just encourage those centralist politicians to change their views a little.

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