What a Trump presidency might mean for UK investors
PUBLISHED: 09:00 01 December 2016
The dust is now starting to settle in the aftermath of Donald Trump's surprise presidential election victory. Simon Lewis believes the time is right to pause for breath, filter out the media hype and objectively consider what a Trump presidency might mean for UK investors.
Although only a few journalists might be prepared to admit it, the media generally must believe that its fairy godmother waved her wand and made their wish come true. Love him or loathe him Trump will certainly make a colourful President of the United States and will surely provide countless column inches of controversy during his tenure. However, even our most beloved media institutions are now pretty shameless when it comes to using its editing prowess to pluck comments out of context in order to reinforce the media spin on a story. It is therefore important not to take everything we see, hear and read too literally.
It was smart to play the fool
Trump was taken seriously but not literally by his supporters and literally but not seriously by his detractors. It didn’t end well for his detractors and investors need to learn from this. In fact, the first assumption that should be made by investors is that Trump is smart. No fool could firstly build a sizeable personal fortune from scratch and then win a US presidential election. Trump worked out what was wrong with America and articulated what he believed he could do about it in a way that resonated with voters. He then perfectly played the role of plucky underdog to snatch victory from the clear favourite.
The American Dream has faded
Although compared to most mature economies the US has been performing well from the perspective of unemployment and GDP growth, such growth is well below its long term average. The problem with America is that the ‘American Dream’ has been tarnished by rising inequality. It used to be the case that there was opportunity for all and in most cases, each successive generation could look forward to being more prosperous. That is no longer true and although some of the reasons that have led to this are hard to escape, the fact is that for many workers real terms take-home pay is no better than it was in the 1970s.
Globalisation takes much of the blame for this but protectionism is not the answer. If the US government wants to improve the employment prospects of its workers it needs to provide a stronger incentive for companies to invest in the US. At the moment such investment is discouraged by what is one of the highest corporation tax rates in the world (currently 35%). That’s one of the reasons why successful American companies like Apple chose to manufacture their computers and phones in China, Taiwan, Korea and Mongolia. It isn’t just about exploiting ‘cheap’ labour.
Monetary policy (low interest rates and quantitative easing, courtesy of the US Federal Reserve) has accentuated inequality because as well as shoring up the broken financial system it has acted to inflate the value of assets, widening the wealth gap between those with assets and those without. The actions of technocratic central bankers have also provided politicians with an excuse to dither when it comes to much-needed economic reforms; in a manner that is widely perceived to be motivated by their own self-interest.
Change is coming
Whatever his apparent politics, prejudices and behaviours, Trump does stand for change and he will be motivated to deliver on this promise. He will be aided by the fact that, unlike his predecessor, he will have a theoretical majority in both the US Senate and the House of Representatives. This should mean that a watered down version of his ideas is likely to prevail, which is a significant departure from the previous 8 years of Washington gridlock.
Although we have not heard much in terms of concrete policies (walls on the border aside) there is enough evidence to indicate how his business instincts might drive his political objectives. Trump appears determined to kick-start US economic growth. One of his pre-election pledgers was to increase the economic growth rate to 4%, a level not seen for almost 20 years. It is a tall order but there are a few quick and easy fixes that might improve his chance of success.
A big increase in government spending would lift GDP growth, albeit at the expense of increased government borrowing, at least in the short term. This would allow substantial tax cuts for both individuals and businesses. Individuals would feel richer and spend more. Less tax and higher consumption would incentivise business to invest more. Over time, the resulting increase in economic activity would improve tax receipts, helping to offset the cost of the initial cut in rates.
This fiscal expansion would take the pressure off the US Federal reserve and allow interest rates to normalise over time, which will perhaps allow the asset bubble to gradually deflate rather than burst.
The high corporation tax rate encourages US businesses not to repatriate profits earned overseas and it is estimated that the amount of cash held offshore exceeds $2.5 trillion. Much of this money is therefore unproductive capital and it would be much better for the economy if it were returned to shareholders to either spend or invest in other enterprises. It would make a lot of sense to offer a tax amnesty to business, for example by encouraging repatriation at a discounted corporation tax rate of say 20%. This would theoretically raise $500 billion for the US government, which could be used to finance Trump’s plan to invest in the renewal of the country’s crumbling infrastructure.
The outlook for the US dollar
Although an overly aggressive fiscal expansion might lead to US dollar weakness as a result of concerns for spiralling US government debt, a well judged stimulus is likely to encourage US dollar strength because it will lead to rising US interest rates.
The outlook for bonds
Yields on government and corporate bonds have been artificially low for too long as a result of relaxed monetary policy and it seems likely that fiscal expansion in the US will lead to rising yields by virtue of its inflationary impact. It would seem that this trend is already underway in anticipation of policy change. It is important for investors to remember that for yields to rise, bond prices must fall and the extent of such falls will be correlated to the duration of such securities. Investors should therefore be focusing their positions on short dated and index-linked issues.
The outlook for equities
On balance, the outlook for US equities is positive. A strengthening US dollar will provide further encouragement for US domiciled investors to repatriate their money. A reduction in taxation will increase consumption and improve corporate profitability, which will support share prices.
The UK stock market should also benefit because the US dollar is the currency of global business and many large UK companies earn most of their revenue in US dollars. A stronger US dollar will inflate profits in sterling terms, supporting higher share prices.
However, there will be losers as well as winners. Global emerging markets are likely to struggle as a result of a stronger US dollar because it will encourage investors to take money away from what are generally less liquid markets. It will also increase the debt servicing costs for many businesses.
Global financial markets are likely to remain volatile while they adjust. Long term investors need not worry, provided of course that they a sensible asset allocation strategy. This is an area where we excel so if you would like us to provide you with one, please get in touch.
Simon Lewis is writing on behalf of Partridge Muir & Warren Ltd (PMW), Chartered Financial Planners, based in Esher. The Company has specialised in providing wealth management solutions to private clients for 47 years. Simon is an independent financial adviser, chartered financial planner and chartered fellow of the Chartered Institute for Securities and Investment. The opinions outlined in this article are those of the writer and should not be construed as individual advice. To find out more about financial advice and investment options please contact Simon at Partridge Muir & Warren Ltd. Partridge Muir & Warren Ltd is authorised and regulated by the Financial Conduct Authority.