By Stefan Isaacs
The votes are in and it is clear. For the second time in 2016 we have had a major rejection of the political status quo. Following on from the shock UK referendum result, a Trump victory is further evidence that many believe that we have reached peak globalisation and income inequality. The perceived losers of globalisation have turned the incumbent political system on its head, and with it we should expect change.
So here are five predictions:
The US will move to a fiscally accommodative stance. Whilst President-elect Trump may be somewhat constrained by a Republican controlled House of Representatives, it’s safe to assume we will see tax cuts, infrastructure and defence spending. With an economy at close to full employment this will prove inflationary in the medium term and yield curves will continue to exhibit a steepening bias. This should be positive for higher beta assets including the US high yield market.
Inflation assets will outperform deflation assets. Paper assets will underperform the likes of commodities and property in a world where politicians are playing the populist card.
Europe will face significant political challenges over the next twelve months. If we have learnt anything this year it is to expect the unexpected. Could we see significant political changes in France and Germany? Will Italy vote against Senate reform in the upcoming referendum on December 4? This could raise very real questions about the future direction of the Eurozone, an outcome which is certainly not priced into peripheral European markets at present.
A Trump presidency will result in lower trade with Europe. As a result, the fragile recovery taking place in Europe could be put at risk. It’s too early to talk of ECB taper. They will extend their QE later this year after making some adjustments.
Trump may not build a wall. But even if he does, it won’t keep the robots out. Their numbers are set to have more than doubled to over 2.5 million by 2020. Alongside a declining but nonetheless significant savings glut in Asia, the robots are the constraining factor on inflation and bond yields. Whilst bond yields will trend higher they will not return to pre-crisis levels.
Stefan Isaacs is deputy head of retail fixed income at M&G Investments
