Feature | The Trump Effect 22 | portfolio institutional | January 2017 | Issue 63 The Trump Effect | Feature The Trump Effect: what a new era of US politics means for long-term investors As Donald Trump stands poised to take control of the White House, Emma Cusworth considers how his presidential tenure might affect institutional investment. Back in 2000, the writers of the satirical take a fairly hard-line approach to deliver- US programme The Simpsons predicted not ing on some of his key election promises. just Donald Trump’s election as president, He is also likely to be able to achieve a con- but also what would follow. Lisa Simpson, siderable change in US fiscal policy to fulfil who succeeds Trump to the Oval Office his plans to cut corporate and personal tax during the ‘Bart to the Future’ episode says: rates, and increase spending on defence “As you know, we’ve inherited quite a and infrastructure. Financial market regu- budget crunch from President Trump.” lation in the form of Dodd-Frank is expected Secretary Milhouse Van Houten responds: to be largely rolled back and, although he “We’re broke.” will not repeal Obama Care entirely, he is With Trump’s penchant for leverage and likely to make significant changes to the election campaign rhetoric suggesting his Affordable Healthcare Act. The latter could presidency would see a significant change prove highly damaging for the nation’s in fiscal policy, some experts suggest fiscal strength. Milhouse’s predictive powers may not have According to Saker Nusseibeh, CEO of been too far from the mark. Hermes Investment Management, markets And even though four, or even eight, years are not thinking carefully enough about the may seem like a short period, Trump’s extent of Trump’s ability to push through approach to government debt, foreign change. “He has both houses supporting policy and climate change, coupled with his him,” Nusseibeh says. “That puts him in a unpredictable personality, could turn out to stronger position than many presidents have long-lasting consequences for have been in for a long time. He will be investors. more able to push through his policies and Early evidence of key White House appoint- I’m not sure if markets fully understand ments suggests Donald Trump is likely to the consequences of that.” Issue 63 | January 2017 | portfolio institutional | 23 Feature | The Trump Effect FISCAL POLICY AND INFLATION (JPMAM), “but it is the wrong time for approach to a potential December hike, his Trump’s infrastructure spending appears major tax cuts today.” inflationary policies are increasingly to make a lot of sense given the considera- Tax cuts would have a positive effect on expected to have the opposite effect, bring- ble need for America to both maintain consumption, further adding to inflation- ing forward any future rate hikes. Yet mar- existing infrastructure and build new pro- ary pressure. kets appear to be at risk of complacency jects. Figures from the Congressional According to Pimco’s global economic regarding the potential speed and scale of Budget Office show real spending on trans- adviser, Joachim Fels, although the Fed hikes. port and water infrastructure, for example, might initially welcome higher inflation By mid-November, markets were pricing fell 9% between 1985 and 2014. The aver- and tolerate an overshoot of the target for only an 18% chance of the Fed hiking once age age of transport and water infrastruc- some time, the Fed would eventually likely in December and twice more in 2017. “That ture has also deteriorated markedly, need to raise rates more aggressively than seems very low,” JPMAM’s Stubbs says. increasing from an average of 19 years in in a scenario without fiscal stimulus. This 1960 to 26 years today. This trend has could “end in tears”, Fels says, as it may POLITICALLY-DRIVEN VOLATILITY accelerated in the post-financial crisis era push the economy into recession in 2019 In theory, at least, Trump’s victory and due to budget cuts. or 2020. likely policy direction should mark the end The scope to spend on repairs and mainte- The likelihood of this outcome unfolding of the 30-year bond bull run, but that view nance, as well as building new projects, would be considerably higher if Trump doesn’t take account of political creates a large number of ‘shovel-ready’ deregulates the financial sector by gutting uncertainty. opportunities for Trump’s administration Dodd-Frank. “Whatever changes they make And on this score the early evidence is not to deploy its planned $1trn on infrastruc- will make it easier and more attractive for very promising. Trump’s attitude towards ture over the next 10 years. banks to lend,” JPMAM’s Stubbs explains. President Vladimir Putin is perhaps the But there are two underlying problems “Credit growth is a key driver of inflation. starkest example. The chances of the US with his plan. First, his ability to finance At the moment inflation is perfectly man- and Russian premiers agreeing a deal is this kind of project through some form of ageable, but it could quickly go off the unlikely without compromising the sover- public-private partnership is limited as radar.” eignty and security of some central and investors are less interested in the types of eastern European countries. The alterna- assets this involves. Second, with the US BOND RIOT tive is a hard-man stand-off that could raise economy at near-full employment (4.9%) The market has already spoken to some a significant nuclear threat. and tens of thousands of jobs still unfilled degree when it comes to the outlook for US According to Hermes’ Nusseibeh, markets in the construction industry, it is not clear inflation with $1trn wiped off the value of are not paying close enough attention to the right people are in the right places bonds in the first few days after the sur- the potential for political instability in when it comes to creating jobs for prise election result became clear – an developed markets, to which the Trump- America’s disillusioned masses – Trump’s undoubtedly painful period for any inves- Putin axis will prove key. “If Trump signals electoral base. tors holding long bond positions. to Putin that he can continue to expand in Three likely consequences arise from this Christopher Wood, chief strategist at Europe, the risk premium in Europe will strategy: increased pressure on wages CLSA, expects the 10-year Treasury bond go up. Markets are not discounting that,” (which will only be exacerbated if Trump yield will “break out” and bond prices will he says. also pushes through anti-immigration move lower as part of what he called the Trump’s foreign policy decisions could also reforms as immigrants have traditionally “ongoing bond riot” in anticipation of have a meaningful – although as yet less made up a significant proportion of the Trump’s policies. clear – effect on oil price volatility depend- infrastructure-based workforce), a marked JPMAM’s Stubbs says: “Holding ing on how they affect developments in the increase in public debt and inflationary short-dated government paper seems to be Middle East. pressure. a dangerous place to be.” He expects to see Many experts had been watching to see Now consider the tax cuts. The US economy bear flattening over the next 12 months as who Trump would appoint as his closest that Trump will inherit is in fairly good short rates increase more than they do at advisers – appointments that don’t require shape. Real economic growth has begun to the long end. Senate confirmation – and the early pick up, S&P500 earnings have rebounded Investors also risk being caught out if the evidence is not reassuring. Stephen from their oil and dollar-fuelled lows of Fed does follow the more aggressive stance Bannon’s appointment in particular has 2015 and inflation is still moderate. on rate rises that Pimco believes it will have sparked widespread protest among human “In 2010, that plan would have been fantas- to take. Although early suggestions follow- rights groups and both Democrats and tic,” says David Stubbs, global market strat- ing the election suggested a Trump victory Republicans, given his reportedly white-su- egist at JP Morgan Asset Management would lead the Fed to take a more cautious premacist stance. A weak Chief of Staff in 24 | portfolio institutional | January 2017 | Issue 63 The Trump Effect | Feature the form of politically inexperienced Reince could be even harder to negotiate given the ment’s head of sustainable investment, Priebus adds strength to the ability of arguably needless tax cuts will add signifi- Mike Fox. “The chances of a Trump victory Bannon and Trump to set the agenda. cantly to the overall debt burden above and or a vote for Brexit looked very unlikely Other hardliners, including Jeff Sessions to beyond meeting interest payments. It is early in 2016.” head the justice department and Mike also not clear how Trump’s policies will Where does this leave investors? Nusseibeh Flynn as national security adviser, suggest de-rust the Rust Belt, which could have its believes this environment, driven by the next administration will err on the own consequences if angry dissent sets in political uncertainty, should strengthen the more extreme side of Trump’s election across Trump’s supporter base. case for a buy-and-hold approach. rhetoric than many market participants Trump has already proven himself to be The investment community has become had hoped. easily baited even since his election victory, used to an investment strategy that focuses While it is still difficult to predict what adding to the unpredictability of his on tactical asset allocation, best seen in the Trump’s foreign and domestic policy path leadership.