Trump’s double surprise

It is quite clear that in the days leading up to the U.S. Presidential election, both markets and surveys got it wrong. Traditional polling once again failed to spot the depth of support for radical political change. This was after all the U.S., which has delivered the strongest post-crisis economic performance of any developed nation.

The gyrations in global markets following Trump’s surprise win in the U.S. Presidential election once again highlight the risk of trying to map political events onto market outcomes. In our view, the remarkable turnaround in markets following the Trump victory tells us more about investor positioning than anything else. It appears that rather more investors were fearful of investing prior to the election than anticipated, leading to something of a short-squeeze in global markets followed the overnight rout during the count. As everyone who wanted to sell had done so, there was little stock left for buyers.

Trump’s early mention of repairing U.S. infrastructure also ignited a 10% rally in the basic resources sector. While increased infrastructure investment is clearly beneficial at the margin for this global sector, the size of any program remains uncertain and any positive impact on profits will be a number of years away. Again, the speed and size of the rally appears to be more to do with investor positioning than the fundamental outlook.

The key parallel with Brexit is an increase in political uncertainty under Trump. A grand vision has been presented but it is unclear how much of this can be delivered within the constraints of the U.S. political system. However, there is already in our view a clear policy of transitioning away from using monetary policy as the primary economic stimulus, in favour of fiscal policy. We believe both these factors are likely to result in increased volatility, increased government bond yields and higher risk premia in financial markets over the medium term, notwithstanding the recent rally.

Looking further out, the key lesson of the campaign is that the growing seam of discontent during this uneven period of economic expansion needs to be addressed. Lessons will need to be learned to avoid further political shocks in Europe. If it was “the economy, stupid” in the 1990s it is the perception of inequality and unfairness which is now attracting the popular vote.

This plays into our theme of a shift away from reliance on monetary stimulus which targets asset prices. Instead the focus is likely to shift towards infrastructure spending and other fiscal measures which target “Main Street” – and not just in the US. There is however likely to be more fanfare than action in this regard, especially in the near-term. It is also difficult to see how such a policy shift can be a major opportunity for stock market investors given currently high global valuations, which have to a large degree been driven upwards by the years of ultra-loose monetary policy.

Quick conclusions

1. Trump has double surprised markets with a Presidential victory and a rally in risk assets. We believe this rally was due to investor positioning (a factor which we underestimated) as nothing new has emerged from the Trump camp since the election.

2. In time, the promises made to the swing voters will need to be delivered upon and we expect increased infrastructure investment and fiscal deficits to drive growth rather than monetary policy under the new U.S. administration.

3. In line with our earlier views, such a transition may benefit Main Street more than Wall Street. We view the US stock market as overvalued at current levels and are not convinced that fiscal policy initiatives will be as beneficial for investors as the trillions of dollars of central bank intervention in financial markets in recent years.