What’s the story?

The US presidential election has been highly anticipated, not just for US investors, but for global investors too. Rarely has an election and its potential outcome affected markets to such an extent, and rarely has an election been so close. This has left markets without clear direction over the better part of last month. In the end, it all came down to a handful of swing states – and now the results are in. 

Donald Trump defeated Vice President Kamala Harris. After a dramatic election night, the Republican will succeed Joe Biden as the 47th President of the United States of America. He secured the necessary 270 of the 538 electoral votes. Crucial to his success were victories in swing states such as Pennsylvania and Georgia. Furthermore, the Republican Party has regained control of the Senate and is likely to defend its majority in the House of Representatives, giving Trump a unified government and a strong mandate to push through his legislative agenda.

With the Republican Party potentially in control of both the White House and Congress, it is looking increasingly likely that the Tax Cuts and Jobs Act of 2017 will be extended, something that investors have been focusing on. Trump has frequently expressed his enthusiasm for tax cuts, but there is no plan to offset their cost. 

While this will likely lead to increased economic growth, it will also create significant uncertainty in three key areas: 

1. Inflation, which may rise.
2. Fiscal/public debt, which may worsen.
3. Monetary policy, which may become less accommodative.

USD: Short-term strength, long-term weakness

Where does that leave the US dollar? Trump has expressed a desire to weaken the USD, but his economic policies could work in the opposite direction in the short term. In a first reaction, the USD is trading significantly higher against all of the major currencies (at the time of writing). In the medium to longer term, however, policy uncertainty and a deterioration in the trade and budget deficits argue against jumping on the USD strength bandwagon.

Fixed income: Less duration, more credit

Uncertainty around inflation, fiscal deficits, and higher nominal growth are negative for bond markets and duration. Our fixed income strategists prefer a short-duration approach in this political and economic environment until the process of finding a new equilibrium is completed. Ten year US Treasury yields surged to a four-month high of 4.46% as results trickled in. Uncertainty over trade policy and rising US bond yields are also challenging for emerging market debt. For investors looking to capture credit risk premiums, our strategists prefer to shift part of the risk budget out of emerging market debt and into US bonds, in particular the more speculative issuers in the US high-yield segment, as it hosts more domestically oriented producers that will benefit from tax cuts, protectionism, and deregulation.

Equities: A Trump sweep is positive for US equities

US equities were extending their gains as results came in. A second Trump presidency increases the likelihood of a continued favourable corporate tax regime alongside a low regulatory burden, which should boost corporate profits and be net positive for equities. Looking below the index surface, banks, oil & gas, defence contractors, large-cap pharmaceuticals, and small caps will probably be the immediate beneficiaries. Beyond the short-term impact, the better growth outlook in the US should give cyclical sectors like industrials and quality mid-caps a further boost. Value stocks will probably outperform the growth segment in a higher-yield environment.

Gold: Buy the rumour, sell the fact?

The gold market does not seem very surprised by what is shaping up to be a Republican sweep in the US presidential elections. After remaining rangebound in early European hours, prices started to trend softer in what could be interpreted as a ‘Buy the rumour, sell the fact’ situation. Looking ahead, the big question for the gold market is how different today’s version of President Trump will be from the one that won the election eight years ago. Back then, expectations of pro-growth policies supported the US dollar and lifted US bond yields, which in turn weighed on gold prices. 

While we also call for higher growth, a stronger dollar, and higher bond yields this time around, the outlook for gold still seems different. There are broad-based concerns in the gold market about ballooning fiscal deficits and rapidly rising debt levels in the United States, which at some point could undermine the US dollar’s role as the world’s reserve currency. In turn, gold would stand to benefit, though not immediately. 

What does this mean for investors?

A second Trump presidency should be positive for equities and boost corporate earnings. For fixed income investors, these reflationary policies come with higher fiscal deficits and higher growth, arguing for a short-duration approach and a preference for US high-yield over emerging market debt in the credit space. Gold should also continue to do well in this environment.