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LGT Vestra US

CIO Question Time – Autumn statement and US election - Nov 2016

Jonathan Marriott – Chief Investment Officer

What do you think the impact of the US election on markets will be in the short run?

In the final week running up to the election, markets will continue to be moved by the swathes of last gasp opinion polls.The effect that favourable poll results currently has on the market, for both Trump and Clinton respectively, could provide useful insight into what the immediate short term stance could be depending on whichever outcome.

When concerns have risen about the prospect of Trump getting into the White House, there have been some predictable moves. The notable ‘safe haven’ asset of gold has tended to rally and, our view is, this would be seen to an even greater extent if he were to succeed. We would also most likely see a fall in US treasury yields for 2 reasons: firstly, this is because it is similarly deemed a safe investment and hence would experience a mass inflow of capital; secondly, the December rate hike by the Fed that is largely priced into the market would be very unlikely to occur.

As we know, equity markets do not like uncertainty and thus a Trump presidency would most likely bode poorly for this asset class in the immediate aftermath of the election. Lastly, we’ve seen a negative relationship between the Mexican peso and Trump’s popularity over recent months given his protectionist trade policies and immigration standpoint. If he is elected, the peso and other emerging market currencies are likely to tumble. It is important to note that these are what we expect as a knee jerk reaction to Trump being elected rather than a long term view on markets.

Predictably, a Clinton presidency brings with it the reverse for all the above. She is seen as a safe continuity of the Obama regime and would bring relative certainty to markets. We foresee a greater short run effect on these assets from a Trump presidency than a Clinton presidency and expect that the extent of any moves will be determined by who wins control of the two chambers of Congress.

With the Autumn statement this month, what do you expect for fiscal stimulus and will it have an effect on monetary policy?

Next month the new UK Chancellor, Phillip Hammond, will give his Autumn Statement to the House of Commons. This involves an update on the state of the economy and a summary of the spending plans of the new government. Many are expecting a shift from his predecessor’s austere fiscal strategies which have failed to substantially reduce the budget deficit. Monetary policy has been given its chance to jump start the developed global economies and now, it is likely the time for fiscal policy to take centre stage. In recent months, there have been green lights on huge infrastructure projects, such as the nuclear plant at Hinckley with the help of foreign investment and a third runway at Heathrow airport. A shift towards fiscal spending is aided by the low interest rate environment making borrowing for governments far cheaper than in the past.

However, in order to undertake a large fiscal stimulus, the UK government will presumably most likely have to raise capital from the likes of pension funds and foreign investors. The reason being, the budget deficit is already very high and this problem would most likely be exacerbated by an expansion of fiscal spending. This move in fiscal spending is a possibility and we feel that should this occur, it is unlikely we will see a further rate cut by the Bank of England over coming months.

 

 

 

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