Post-election falls are a buying opportunity for stocks & dollar

  • Equity declines on news of Mr Trump’s win are a buying opportunity.
  • Corporate tax cuts and infrastructure spend should boost US growth and profits
  • Fed likely to tighten more, not less, raising the dollar and bond yields
  • Tariff hikes are the main global risk and tax on overseas cash can hurt tech

The short-term reaction to the result has continued the pattern seen in the weeks before the election, with stocks and the dollar falling when Mr Trump seemed more likely to win and rallying when Mrs Clinton was in the ascendant. But for investors looking beyond this knee-jerk reaction, it is time to put aside the emotion and drama of the polls, and look at the actual policies likely to be implemented. On balance, those seem to be positive for stocks and the dollar.

Mr Trump has signalled policies that include a major fiscal expansion, estimated at more than $5trillion over the next decade, reflecting large cuts in corporate and personal taxes, offset only slightly by cuts in healthcare and social spending, and by a planned charge on US corporate cash held abroad. With the Republicans retaining control of the Senate, there is a reasonable chance that significant elements of this plan may be implemented, although the “fiscal hawks” will likely ensure that the scale is smaller.

„Donald Trump’s victory is a vote for change, albeit also likely unpredicatability. His economic plans are not well crafted and are unaffordable if enacted. The economy will suffer and the political climate will be highly uncertain.“


Fed likely to tighten more

Conventional macroeconomics suggests that fiscal expansion, coming at a time when the economy is approaching full employment, would be met by the Fed with tighter monetary policy, which would in turn push up both bond yields and the dollar. With inflation now picking up and the jobs market reasonably robust, the Fed was poised for a rate rise in December and we think they will go ahead. If major fiscal expansion plans are implemented next year, we think the Fed will respond by accelerating its future rate increases and we believe the dollar and bond yields will rise quite soon in anticipation of this, more than reversing their initial post-election moves.

„With Trump as president I see a big issue on trade deals with countries like Mexico, but also ripple effects for Europe and Asia. Europe will here not be able to take the baton anymore.“


Biotech and Banks benefit, risks for Tech companies

We think the overall result of all this will be faster GDP growth, higher post-tax corporate profits and a stronger US stock market over the next couple of years, as the fiscal expansion and lower taxes dominates the effect of higher bond yields and a stronger dollar. US debt will rise but we don’t see it reaching danger levels. Winning sectors include construction companies as infrastructure spend grows, but their prices already reflect much of the good news; biotech stocks, a Werthstein Zeitgeist, should benefit from the reduced risk of price limits. Banks, in Europe perhaps even more than the US, are potential big winners if the “easy fiscal, tight money” policy change allows Europe to end its negative interest rates over the next year or so, and lets bond yields rise. Losing sectors include big tech companies, due to the plan for a penal charge on company assets held offshore, there will probably be some concessions.

The bigger global threat is from a tightening of trade conditions, with the President having substantial executive powers to suspend or terminate existing trade deals. While Mr Trump may choose to exercise these powers in respect of NAFTA, which very visibly affects US jobs, this is largely discounted via the fall inn the Mexican Peso. Elsewhere, it is likely that he will use the threat of tariffs as a bargaining chip, rather than acting precipitously. Indeed, his very first comments on winning were that he would work with any country that wished to work with the US. Overall, we see the potential benefits of an activist President, whose party controls the Congress, as a positive for risk assets and we see the post-election falls as a buying opportunity.

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