US election fallout: where do the investment opportunities lie?

Trade policy is an area of immediate concern for markets, following Donald Trump’s unexpected US presidential election victory and could dampen the global economic outlook.

“We are heading into a world of unprecedented political risk which calls into question the pillars of the post second world war settlement,” says Dominic Rossi, global CIO equities at Fidelity International, adding that investors must keep a clam head and not be drawn by short-term noise.

Yet some investment professionals are surprisingly upbeat on markets. “Most likely we will have a correction in markets rather than a panic spiral,” says Mads Pedersen, CIO and head of global asset allocation at UBS Wealth Management, pointing to the relative stability of the “challenged” RMB and Swiss franc. The tycoon has fast modified his stance from “battleground man winning an election to father of the nation,” with a “primary promise to deliver jobs and growth.”

While the Fed is expected to raise interest rates in December, UBS predicts higher inflation, deriving from potential trade restrictions and fiscal stimulus, although this might not be negative for the financial system. A more “reasonable president” than feared could support a benign market, accompanied by rising earnings and underlying stimulus for the global economy, says Mr Pedersen, who believes the US will be the safest market choice for clients.

While emerging markets face downside risks deriving from increased trade protectionism, anti-immigration measures, large scale fiscal expansion, US yield curve steepening and uncertain foreign policies, resulting volatility may create opportunities.

“This is a surprise outcome for markets and is likely to raise uncertainty in the near term,” says Min Lan Tan, CIO and head of Apac Investment Office at UBS Wealth Management. Most Asian equity markets and currencies may see some pull back, although the Japanese yen will likely benefit from the safe haven trade, expects Ms Tan.

Imposition of trade tariffs and whether China is named by the US Treasury as a currency manipulator will be key indicators. “For decades, Asia has been a major beneficiary of the US bias towards free trade and open market access. If Mr Trump were to impose punitive trade tariffs on China or to substantially renegotiate key free trade agreements, this could limit US to Asia trade growth for years to come,” she says. 

But sustained drawdown in Asian equities is unlikely, given attractive valuations and recovering earning fundamentals, according to UBS, expecting mid-single digit earnings growth next year, following a flat 2016.

With Republicans controlling both chambers of Congress, the billionaire businessman, who has no public office experience, will enter office as the most powerful president in recent history, although he faces open dissent from within his party.

Market volatility will remain until the legislative agenda becomes clear, predicts Mike Ryan, ‎chief investment strategist at UBS Wealth Management Americas.

With a much polarised debate dividing the country, the focus is on whether Mr Trump will be able to bring different factions of the population together. Expenditure on infrastructure, to which Mr Trump has promised to commit several hundred billion dollars, is one such cause for common ground between  Republicans and Democrats.

“Infrastructure could benefit the US economy, not just with regards to job creation and short-term growth, but also paying long-term dividends, by improving US productivity,” says Mr Ryan.

While elections certainly, matter, “fundamentals matter a great deal more”, says Mr Ryan, calling for more focus on how US organic growth rates, monetary policy and global trends can impact the US economy.

Shorter-term market movements should not alter bottom-up investment approaches. The investment case for companies delivering structural growth is not dependent on who holds presidential office in the US, but rather the companies’ positions in their respective industries, says David Bertocchi, head of global equities at Barings.

Barings finds growth opportunities in electric vehicles, advanced driver assistance systems, autonomous automobiles, transportation services, digital content delivery, e-commerce and medical technology.

“Economies might be growing at a pace below historical levels and political uncertainty is high, but innovation is still thriving,” states Mr Bertocchi.