Investment Desk Bulletin

15 November 2016

Financials update after strong Q3 earnings and thoughts post-Trump election

IDB 15 11 16

By Rabbani Wahhab & Craig Shute

In this week’s IDB we give our initial thoughts on President-Elect, Donald Trump’s campaign policies and examine what Q3 earnings have meant for financial fixed income. During the election campaign, Donald Trump made a series of policy pledges which, if implemented, could be important for investors. These include:

- Tax cuts – Unfunded cuts of $4.5tr over 10 years

- Spending cuts - $1.2tr cuts over 10 years, repeal Obamacare

- Infrastructure spending - $0.55tr over 10 years

- International Trade – Impose 45% tariff on Chinese imports

- Federal Reserve – Replace Chair Janet Yellen

- Regulation – Repeal of Dodd-Frank Act

Of these,

- Cuts to income and corporate taxes are arguably the biggest ticket item and at this stage look mostly unfunded. If this is the case it will promote growth, but also widen the budget deficit and steepen the treasury yield curve.

- The rolling back of the Dodd Frank Act would have an impact on US Banks, but nothing is concrete and we must wait for policy details. However, Basel III will continue to be the dominant driver of bank regulatory capital. Recent Q3 US bank earnings releases have been unambiguously positive and demonstrate ongoing capital base improvement.

- There may be some implications for US Banks post-Trump election, but the major thrust of regulation will probably remain unchanged.  Subordinated financials still offer attractive value and low correlation to US Treasuries and continue to be at the core of fixed income exposure.

Please click here to view the presentation.