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Much remains unclear post the election result. Trump already appears to have moderated his view on certain issues and it is difficult to determine which of these will become a political reality.  It is clear that the US will now become more focused on domestic issues rather than global issues.

The main elements of Trump’s campaign included greater fiscal stimulus, infrastructure spending and capturing a greater share of global trade. The final objective is likely to increase tensions with China, which could lead to the US to placing tariffs and taxes on Chinese goods to make its own goods more competitive. The overall impact of these tensions on global economic growth remains unclear.

Financial markets have reacted more positively after the initial shock, as investors embraced the potential for higher US economic growth under a Trump presidency. The chart below shows the sharp selloff and subsequent rally.

Investors were particularly enthusiastic about a return to fiscal stimulus given the commonly held view that low interest rates are now having limited impact.

Global bond yields have also jumped in response to the prospect of higher inflation from US fiscal stimulus. Higher US bond yields has seen the US dollar appreciate against all major currencies. A higher US dollar could relieve pressure on the Australian dollar thereby reducing the RBA’s incentive to cut the cash rate again. Unhedged exposure to international equities would also benefit from a declining currency.

Domestically resource stocks are seen as beneficiaries of increased demand for coal and iron ore from Trump’s energy and infrastructure policies, as are construction companies with exposure to US activity. Infrastructure, utility and property stocks are seen as underperformers because of the risk of higher bond yields.

It is far too early to know for certain how all these forces will play out and what the impact on global markets will be. We will provide a further update on the implications of Trump’s presidency in our first Private Wealth View in 2017.

We will continue to monitor events in the US for potential impact on client portfolios, with volatility expected to remain above average until further clarity on Trump’s policies is provided. We will provide another update if an adverse event occurs that will materially impact financial markets.

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