Investment Desk Bulletin

22 November 2016

A Brave New World

IDB 22 11 16

By Pau Morilla-Giner

In this week’s IDB, A Brave New World, we build on last week’s presentation and examine what a Trump Presidency may mean for economic conditions and financial markets. Although many have drawn parallels with the 1980’s and Ronald Regan’s years in office, we conclude that the base case for Trump-nomics is somewhat different.

- The policy unknowns of a Trump presidency remain significant, for investors, more clarity on tax cuts, infrastructure spending and their impact of the budget deficit are critical. While we wait for more policy certainty, financial markets will ask if this is the start of a new world of decreasing globalisation, fiscal expansion, stronger US growth, higher inflation and rising bond yields. The initial market reaction has been to emphasize the positives and put less weight on the negatives of the policy agenda.

- Those expecting Reaganomics 2.0 from Donald Trump will probably be disappointed, because the economic backdrop is considerably different. For example, Trump’s unfunded tax and spending policies will be constrained by the c100% public debt/GDP debt profile in the US; a problem Regan did not have to struggle with when government debt sat closer to 30%. The base-case for Trump-nomics is more likely one of mildly improving growth prospects, firmer inflation, a shift to fiscal stimulus and a lengthened US business cycle. However, the risk of a Boom-Bust has increased given the relative strength of the US labour market.

- We expect markets to re-price US rates higher in anticipation of Trump-nomics, but do not expect a violent sell-off. Higher yields should translate into a stronger US Dollar, especially versus the Euro and Emerging Market currencies.

Please click here to view the presentation.