How will a Trump presidency affect your investments?
10 November 2016
It would be one of the greatest understatements to call 2016 a year of political surprises. After the UK's shock vote in June to leave the European Union, 8 November will be remembered as the day the unlikely candidate Donald Trump was elected the 45th President of the United States. StatePlus Investment Strategist Michael Winchester tells us more.
How have financial markets reacted to the news of a Trump presidency?
The initial market reaction to a Trump victory was negative, with share markets falling significantly during the Australian and Asian trading day. Bond yields fell and safe haven assets rallied strongly. By the time US markets opened however a different mood had taken hold. The initial read of the market appears to be that a Trump presidency will be positive for growth and will be inflationary, and so shares recovered their losses to post small gains on the day, and bonds lost ground.
Markets just don’t like uncertainty, and we expect there will be more volatility in the short term as investors try to assess the impact of this unexpected outcome on company fundamentals. Maintaining a diversified portfolio and not overreacting to short-term moves will be important to preserve capital.
What will happen to my investments?
As the world’s largest economy, what happens in the US will have an impact on investment markets globally. We actively manage your investments, and our StatePlus portfolios are well diversified and defensively positioned.
We and our investment managers continue to monitor risks and opportunities in markets, and adjust positioning over time to improve the probability of meeting the long-term objectives. Our response to events such as the US elections, is to ensure the StatePlus investment options are appropriately diversified across both growth and defensive assets.
Things are so uncertain, should I sell and convert to cash?
Remember that selling growth assets such as shares when they have fallen in price, destroys wealth. Markets will go up, and they will come down. We can’t over-emphasise how important it is to have an appropriate long-term financial plan, and stick to it. If you’re unsure about your investment strategy, it’s a good idea to talk to your financial planner.
What major changes can we expect with a Trump presidency?
This election campaign has been bitterly fought and while Trump’s acceptance speech was gracious, it is unlikely that the ugly divisions along geographic, racial and gender lines will be healed in the near term. The closeness of the election reflects the fact that economic growth has been quite modest and a large segment of the US population feel as though they have been left behind. In voting for Trump they have voted to change the status quo, and have elected a president who is somewhat of an outsider even within his own party.
The US economy has recently been performing well, but the new President will want to quickly work to rebuild business and consumer confidence, and provide more certainty around policy to ensure this positive momentum continues.
Trump’s policy positions in many areas are unclear, and some are unlikely to be able to be implemented. We will learn more over coming months as key appointments in his administration are made.
A mixture of large tax cuts and increased defence spending would, if implemented, provide a significant boost to the economy in the near term, but would also result in large government deficits. With the US economic cycle already well advanced the resultant stimulus could see higher inflation and force the central bank to raise interest rates at a faster pace than they otherwise would.
Should we be worried about the economy?
Actually though, the ability for politicians to significantly impact on the economy tends to be exaggerated. While we’d expect marginally slower economic growth and higher inflation in the US and globally under a Trump presidency, negotiating his policies through the legislative process could well end up with a more orthodox set of measures that are less damaging.
Some of the more concerning aspects of Trump's election platform have been his positions on foreign policy and trade, but we have also seen his position shift over time on some of these issues. We may find that once he’s in office, he ends up much less extreme and closer to the Republican Party's position.
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