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As I See It

Change is looming in the World Order

colin-mclean-newDonald Trump is an immediate negative for markets around the world, as seen already in Asia.  Immediate winners are gold, Treasuries and the Yen; but losers include the US Dollar, Mexican Peso, oil, climate change and equities. 

Since 1948, the Dow has typically fallen under a Republican. But if Trump’s presidency echoes Reagan’s leadership, markets may come to respect the new leader and his policies. What they fear is a Berlusconi. As Brexit showed, fear of the unknown can be overdone by markets. 

The corporate earnings background is favourable, with an earnings season that is beating expectations. Indeed, S&P 500 EPS growth should accelerate next year. But with the election over, US investors should look more at individual company results. This would see the market favour sectors such as banks and technology that have been beating earnings expectations.  

Trump’s presidency will break from the traditional Republican commitment to free trade, imposing a set of protectionist policies to close America’s economic borders. 

Despite Trump’s slogan, much of his comment on change he plans for military commitments represents a sea change in America’s global role.  This is less supportive for global trade and emerging economies.

In campaigning he has said he will immediately announce his intention to “renegotiate” the North American Free Trade agreement with Canada and Mexico. He would also cancel participation in the Tran-Pacific Partnership. That may ease some of the competitive forces that have restricted real wage growth per capita. 

One sector that feared Hillary Clinton and should now rally is healthcare. The major UK pharmaceuticals are exposed to the US market which was threatened by her proposed pricing reforms.

This year the sector has de-rated, losing its premium rating of 20-30%. But Trump has said he will repeal Obamacare, and the sector may be helped by his new plans. Clinton would also have brought the prospect of either a higher marginal tax rate or higher taxes on capital gains, or both – a risk that has been removed.

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  • Fear of the unknown can be overdone by markets
  • Markets may come to respect Trump and his policies
  • S&P EPS growth should accelerate next year
  • Healthcare should now rally
  • London listed beneficiaries of infrastructure spend could include CRH, Ashtead and Wolseley
  • Seems unlikely the Fed will delay beyond December

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Both candidates favoured increased infrastructure spending, promising to inject hundreds of billions of dollars in fiscal stimulus. This could raise US economic growth over the longer term, but the benefit may depend on how the work is financed.

Trump has indicated that the cost will be met from reduced climate change spending. There are London-listed businesses that could benefit from US infrastructure and construction, such as CRH, Ashtead and Wolseley. 

Trump stood between an accelerating US economy and Fed intervention. It seems unlikely even so that the Fed will delay beyond December.  At the start of 2016, four ¼ percentage point hikes were expected, but to date none of those increases has taken place.

The Fed saw a risk that a Trump presidency might have cooled the economy and inflation trend. Headline PCE increased 1.2% in September YoY, with non-core PCE – often a leading trend – running at 1.7%.  

Average hourly earnings for private-sector employees were up 2.8% YoY in October, the fastest pace seen in seven years. 10 year Treasuries are also pointing to sharply rising inflation expectations, with the yield curve steepening.  

Next year US output is forecast by the Atlanta Fed to grow 3.1%, the fastest pace in more than two years. Unemployment is low, at 4.9%. But the elephant in the room is that, since 2008, the US has added significantly to its national debt, an extra US$ 15 trillion. Trump is seen as being comfortable with borrowing money.

After the US, investors may focus on the Italian Referendum, where polls currently point to a NO vote.  

Trump looks like part of an ongoing change in politics. In Europe it is clear that the social and political consensus that has prevailed in the West for 60 years is under attack.

Markets may take a few months to assess winners and losers in the new world order, but the US and world economy start from a position of growth.

Colin McLean is managing director, SVM Asset Management

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