United States White House with fountain

Trump Victory

Global market thoughts on a historic election | November 2016

A A A

For the first time since the 1950s, the U.S. electorate has chosen a non-politician to be president of the country. After an extremely atypical general election cycle, the Republican candidate Donald Trump has claimed victory. What does this mean for global markets?

A Trump victory, combined with Republican control of Congress, may initially lead to a sell-off in risk assets and a global equity market retreat, says Sinead Colton, head of investment strategy at Mellon Capital. Newton’s emerging markets team leader Rob Marshall-Lee agrees, noting Trump represents more uncertainty and therefore he expects to see rising risk premiums across most asset classes. His fixed income colleague Paul Brain adds that emerging market assets and indeed all risk assets are likely to initially decline, as investors worry about increased trade barriers and higher U.S. rates.

While Trump’s victory is partially baked in to the market, as the market experienced nine straight days of declines reflecting tightening polls, we do think that there is some additional volatility ahead. The Boston Company’s senior portfolio strategist, George Saffaye, expects markets to further pull back but he believes this volatility will be short-lived because, in his opinion, the U.S. economy remains fundamentally sound. “We have full employment and rising household formations, which has a positive knock-on effect for other sectors. Couple this with low inflation and you have an economy that can grow at around 2% without overheating.”

Sector Impacts

From a sector point of view, Suzanne Hutchins, Newton manager on the real return team, expects pharmaceuticals and drug devices to rally under President-Elect Trump. Colton doesn’t believe all of health care will do as well though, noting pharmaceuticals could suffer as Trump’s election pledge to reduce health insurance costs and previous comments indicating that Medicare should be permitted to negotiate drug prices could be difficult. However, she notes, Trump’s ideas are not aligned with the typical Republican party view, so it remains to be seen whether those aspects would gain sufficient support in Congress. Further, with biotech and pharmaceutical stocks down in the month of October alone, there could be a relief rally in the sector.

Colton notes that Trump’s energy policy may negatively affect green energy and solar and wind technology while it boosts the coal and energy sector. “Trump plans to undo the Obama administration’s climate initiatives. This also includes opposing Environmental Protection Agency (EPA) coal plant restrictions, in addition to abolishing the EPA and opposing green energy subsidies. Consequently, the Trump victory could lead to a significant re-energizing of the coal sector and increased pressure on green energy. America’s energy industry would be reinvigorated as Trump supports increasing domestic shale oil and gas production.

Newton global equity income manager Nick Clay says defense spending will probably rise under President-Elect Trump. Hutchins says other areas likely to benefit under the Trump administration are infrastructure-related stocks, construction and homebuilders, given the huge financial election pledges behind a drive to upgrade the U.S.’s creaking infrastructure. That said, Hutchins believes any progress in this area is likely to be slow as funds may only be available as a result of a deal on the repatriation of cash balances held abroad by large U.S. multinationals.

Trump’s intent to bring jobs back to the US is, Saffaye says, one thing that has roiled markets. “This could include imposing taxes and penalties to incentivize companies to repatriate production. This could materially upset the balance of profitability for overseas manufacturing. But, actually, when you think about it, this would have to be a long process, and it couldn’t be done at the flip of a switch.”

Global Trade & Influence

The North American Free Trade Agreement (NAFTA) was also a target for Trump ahead of the election, and indeed it may be under threat in the long run, Saffaye notes. However, he believes there’s only so much that can be done before the balance is upset too much. In addition, even with the backing of a Republican house, it doesn’t necessarily mean Trump will have control. “It’s impossible to say at this point how any of the new president’s plans might work out in practice, but overall, we feel a lot of what was said in the run-up to the election will be more measured in reality.” Nevertheless, the U.S. executive does have the ability to steer trade negotiations, most importantly through perception and whether future trade will proceed under the current conditions.

Newton’s Brain expects the dollar to remain strong, initially, as ‘safe-haven’ assets gain from the U.S. election result. However, a stronger dollar is usually not good news for emerging market (EM) countries that have borrowed in the U.S. currency. Marshall-Lee notes Trump has repeatedly vilified NAFTA as the worst trade treaty ever negotiated and one which he intends to change. “He has also promised to label China as a currency manipulator and talked about imposing tariffs on Chinese goods. Whether or not he actually ends up carrying through with these threats and whether he has the political ability to do so is another matter.”

Irrespective, the initial market reaction to his election is likely to be negative for Mexican equities and spell further downside for the Mexican peso and many other currencies, Marshall-Lee points out.

“The less U.S.-exposed and less dependent on global financial flows emerging markets, such as India and Eastern Europe, will likely hold up best.”

Insight’s currency manager Paul Lambert comments that the shorter-term outlook is uncertain and so the U.S. dollar is likely to be volatile. However, Lambert believes it may strengthen eventually if Trump is able to push through his proposed ‘repatriation tax holiday’ policy. “Moreover, if he is able to boost fiscal spending, that would potentially push the Federal Reserve (Fed) to raise interest rates by more than currently discounted, again supporting the U.S. currency. Downside risks for the dollar come from the potential reaction of asset markets. A sustained sell-off of equities could shift the outlook for the Fed to easing rather than tightening and this would push the dollar down against ‘safe-haven’ currencies like the euro and the yen.”

Bonds and Rates

Brain believes the expected increased federal government spending under the Trump presidency could lead to a higher (albeit modest) increase in inflation. As such, he believes U.S. TIPS look attractive—both as inflation protection and as a ‘safe-haven’ asset.

Isobel Lee, head of global fixed income bonds at Insight, says the reaction of the U.S. Treasury market and global bond yields are tricky to predict. “On the one hand, given financial uncertainty, weakness in risk assets could prompt a flight-toquality similar to the short-term reaction following the UK referendum. However, if this does not happen, we may be more likely to see higher yields and steeper curves. Trump’s preference for fiscal rather than monetary stimulus may compound what increasingly feels like a growing skepticism towards further monetary policy easing.”

A Trump victory was considered a threat to the Fed with speculation rife that Janet Yellen would either resign or be forced out. Brain says this could be bad for the U.S. bond market but possibly a positive for the dollar as rates could rise faster. Marshall- Lee agrees, noting the subsequent risk aversion of global investors as a result of the election outcome may “lead to the perverse reaction of the U.S. dollar strengthening further.” Colton adds: “The Fed may hit the pause button and defer any U.S. short-term rate rise until the economic implications of a Trump presidency are clearer.”

Brain adds: “Although, on the surface, this is not good news for the bond market, the knee-jerk buying of U.S. Treasuries due to their ‘safehaven’ qualities, amid fear of a global economic slowdown, would swamp any higher cash rate concerns.”

However, Standish’s chief economist Vincent Reinhart doesn’t think Yellen will be that quick to resign. “Janet Yellen cares about her institution and her place in history. By resigning early, Yellen would strip away important political insulation for her institution. For herself, she would be placing an asterisk next to her name in the list of Fed chairs, denoting not having served out one full term. And history has not judged the prior Fed head with an asterisk, G. William Miller, favorably. The fact is, by gritting it out, especially if an ill wind blows strongly from the White House, Chair Yellen establishes herself as an icon of institutional rectitude.”

All investments involve risk including loss of principal. Certain investments involve greater or unique risks that should be considered along with the objectives, fees, and expenses before investing. Equities are subject to market, market sector, market liquidity, issuer, and investment style risks to varying degrees. Bonds are subject to interest rate, credit, liquidity, call and market risks, to varying degrees. Generally, all other factors being equal, bond prices are inversely related to interest-rate changes and rate increases can cause price declines. Investing in foreign denominated and/or domiciled securities involves special risks, including changes in currency exchange rates, political, economic, and social instability, limited company information, differing auditing and legal standards, and less market liquidity. These risks generally are greater with emerging market countries.

BNY Mellon Investment Management is an investment management organization, encompassing BNY Mellon’s affiliated investment management firms, wealth management organization and global distribution companies. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may also be used as a generic term to reference the Corporation as a whole or its various subsidiaries generally.

This information is not investment advice, though may be deemed a financial promotion in non-U.S. jurisdictions. Accordingly, where used or distributed in any non-U.S. jurisdiction, the information provided is for Professional Clients only. This information is not for onward distribution to, or to be relied upon by Retail Clients.

For marketing purposes only. Any statements and opinions expressed are as at the date of publication, are subject to change as economic and market conditions dictate, and do not necessarily represent the views of BNY Mellon or any of its affiliates. The information has been provided as a general market commentary only and does not constitute legal, tax, accounting, other professional counsel or investment advice, is not predictive of future performance, and should not be construed as an offer to sell or a solicitation to buy any security or make an offer where otherwise unlawful. The information has been provided without taking into account the investment objective, financial situation or needs of any particular person. BNY Mellon and its affiliates are not responsible for any subsequent investment advice given based on the information supplied. This is not investment research or a research recommendation for regulatory purposes as it does not constitute substantive research or analysis. To the extent that these materials contain statements about future performance, such statements are forward looking and are subject to a number of risks and uncertainties. Information and opinions presented have been obtained or derived from sources which BNY Mellon believed to be reliable, but BNY Mellon makes no representation to its accuracy and completeness. BNY Mellon accepts no liability for loss arising from use of this material. If nothing is indicated to the contrary, all figures are unaudited.

Any indication of past performance is not a guide to future performance. The value of investments can fall as well as rise, so investors may get back less than originally invested.

Not for distribution to, or use by, any person or entity in any jurisdiction or country in which such distribution or use would be contrary to local law or regulation. This information may not be distributed or used for the purpose of offers or solicitations in any jurisdiction or in any circumstances in which such offers or solicitations are unlawful or not authorized, or where there would be, by virtue of such distribution, new or additional registration requirements.

Persons into whose possession this information comes are required to inform themselves about and to observe any restrictions that apply to the distribution of this information in their jurisdiction. The investment products and services mentioned here are not insured by the FDIC (or any other state or federal agency), are not deposits of or guaranteed by any bank, and may lose value.

This information should not be published in hard copy, electronic form, via the web or in any other medium accessible to the public, unless authorized by BNY Mellon Investment Management.

Issuing entities

This information is approved for Global distribution and is issued in the following jurisdictions by the named local entities or divisions: Europe, Middle East, Africa and Latin America (excl. Switzerland, Brazil, Dubai): BNY Mellon Investment Management EMEA Limited, BNY Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA. Registered in England No. 1118580. Authorized and regulated by the Financial Conduct Authority. • Switzerland: Issued by BNY Mellon Investments Switzerland GmbH, Talacker 29, CH-8001 Zürich, Switzerland. Authorized and regulated by the FINMA. • Dubai, United Arab Emirates: Dubai branch of The Bank of New York Mellon, which is regulated by the Dubai Financial Services Authority. This material is intended for Professional Clients only and no other person should act upon it. • Singapore: BNY Mellon Investment Management Singapore Pte. Limited Co. Reg. 201230427E. Regulated by the Monetary Authority of Singapore. • Hong Kong: BNY Mellon Investment Management Hong Kong Limited . Regulated by the Hong Kong Securities and Futures Commission. • Japan: BNY Mellon Asset Management Japan Limited. BNY Mellon Asset Management Japan Limited is a Financial Instruments Business Operator with license no 406 (Kinsho) at the Commissioner of Kanto Local Finance Bureau and is a Member of the Investment Trusts Association, Japan and Japan Securities Investment Advisers Association. • Australia: BNY Mellon Investment Management Australia Ltd (ABN 56 102 482 815, AFS License No. 227865). Authorized and regulated by the Australian Securities & Investments Commission. • United States: BNY Mellon Investment Management. Securities are offered through MBSC Securities Corporation, distributor, member FINRA and a brokerdealer within BNY Mellon Investment Management. • Canada: Securities are offered through BNY Mellon Asset Management Canada Ltd., registered as a Portfolio Manager and Exempt Market Dealer in all provinces and territories of Canada, and as an Investment Fund Manager and Commodity Trading Manager in Ontario. • Brazil: this document is issued by ARX Investimentos Ltda., Av. Borges de Medeiros, 633, 4th floor, Rio de Janeiro, RJ, Brazil, CEP 22430-041. Authorized and regulated by the Brazilian Securities and Exchange Commission (CVM).

The issuing entities above are BNY Mellon entities ultimately owned by The Bank of New York Mellon Corporation.

BNY Mellon Company information

Investment Managers are appointed by BNY Mellon Investment Management EMEA Limited (BNYMIM EMEA) or affiliated fund operating companies to undertake portfolio management activities in relation to contracts for products and services entered into by clients with BNYMIM EMEA or the BNY Mellon funds. BNY Mellon Cash Investment Strategies is a division of The Dreyfus Corporation. •Investment advisory services in North America are provided through four different SEC-registered investment advisers using the brand Insight Investment: Cutwater Asset Management Corp, Cutwater Investor Services Corp, Pareto New York LLC and Pareto Investment Management Limited. The Insight Investment Group includes Insight Investment Management (Global) Limited, Pareto Investment Management Limited, Insight Investment Funds Management Limited, Cutwater Asset Management Corp and Cutwater Investor Services Corp. This information does not constitute an offer to sell, or a solicitation of an offer to purchase, any of the firms’ services or funds to any U.S. investor, or where otherwise unlawful. • BNY Mellon owns 90% of The Boston Company Asset Management, LLC and the remainder is owned by employees of the firm. • The Newton Group (“Newton”) is comprised of the following affiliated companies: Newton Investment Management Limited, Newton Capital Management Limited (NCM Ltd), Newton Capital Management LLC (NCM LLC), NCM LLC personnel are supervised persons of NCM Ltd and NCM LLC does not provide investment advice, all of which is conducted by NCM Ltd. Only NCM LLC and NCM Ltd offer services in the U.S.• BNY Mellon owns a 20% interest in Siguler Guff & Company, LP and certain related entities (including Siguler Guff Advisers LLC).

©2016 MBSC Securities Corporation, Distributor, 225 Liberty St., 19th Fl., New York, NY 10286