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Investors try to make sense of Trump election shock

Financial professionals arriving at their desks on Monday morning will have no shortage of views to digest on what the shock election of Donald Trump means for global markets.

Having had a few days to consider the implications, economists, market strategists and analysts have penned thousands of words for clients that attempt to set out what the future holds.

As Jan Loeys and his global asset allocation team at JPMorgan, put it: “The easy first conclusion is that we know very little aside from there being a lot of uncertainty. But markets can’t wait until we have certainty, and we can make some educated guesses.”

Here are some of the words of wisdom that are sitting in investors’ inboxes.

For Andrew Sheets, chief cross-asset strategist at Morgan Stanley, the big question to assess is who the real Donald Trump is: the volatile populist who rode a wave of anti-globalisation sentiment, or the pragmatic dealmaker who will implement business-friendly policies. “Like Schrodinger’s cat, his policies existed in a state of being both pragmatic and radical, all at the same time,” he wrote.

Joachim Fels, managing director and global economic adviser at Pimco, warns that “markets are likely to oscillate between hope and fear”.

“If the new administration focuses on reforming corporate and personal taxes, increasing infrastructure spending on projects with high social returns and easing some excessive regulations, both demand and potential output growth could be lifted without creating excessive inflation,” he writes.

“Conversely, a strong focus on punitive tariffs and immigration bans risks retaliatory responses from other nations, and could provoke a trade war that fuels de-globalisation and might even increase the risk of military conflict.”

Megan Greene, chief economist and managing director at Manulife Asset Management, worries that Mr Trump may well be able to implement his more populist ideas quicker than pro-growth measures.

“Not all of Trump’s policies are growth-sapping, just most of his short-term ones,” she says. “The policies that he can implement almost immediately do not need the approval of Congress. These include trade and immigration.

“It will take some time to debate, legislate and implement the stimulus measures Trump has planned, and they probably will not feed through into the real economy until 2018, long after protectionism and isolationism have set in.”

Still, Peter Tchir, managing director at Brean Capital, points out that since his electoral victory Mr Trump “has shown restraint” on “the more controversial aspects of his campaign — those that would potentially hurt the market the most.”

Indeed Tokyo-based Ryoji Musha, formerly of Deutsche who now runs Musha Research, anticipated a new era of “dollar appreciation, higher stock prices and rising interest rates”.

“Surely now that the election is over he will do away with the rhetoric he used to attract voters and move to formulate a consistent and realisable system of policies,” he writes.

Mr Tchir questions whether the emerging market sell-off, as epitomised by the Mexican peso, has been overdone. “What if he cannot be as protectionist as he claims he wanted to be? What part of a growing US economy is really bad for emerging markets?”

He also highlights that small-cap US stocks have outperformed their larger peers since the election — a sign investors believe Mr Trump’s US-first approach, as captured by his “Make America Great Again” campaign slogan, will be good for domestic companies. Mr Tchir is cautious, however. “Clearly fits with the #MAGA hashtag — but investing on hashtags seems fraught with risk, no matter how compelling it sounds,” he writes.

Several analysts argue the combination of looser fiscal and tighter monetary policies will lead to a higher dollar. “Geopolitics may become a medium-term negative [for the dollar] in 2017 if the US pulls back from security alliances in Asia and the Middle East,” write FX strategies at Royal Bank of Scotland. “But in the near term it is likely to pressure regional currencies first.”

Marc Chandler, global head of currency strategy at Brown Brothers Harriman, says the election outcome strengthens the bull case for the global reserve currency. He notes that the $1tn fiscal stimuli mooted by Mr Trump’s economic team is “larger than even [Bernie] Sanders advocated in the primaries”. “At the same time, investors are more confident of a Fed hike next month,” he adds. Such a policy mix, he continues, “is the most constructive combination for a currency. The magnitudes may be different, but that was the Reagan-Volcker mix that fuelled the dollar rally of the early 1980s.”

Mr Sheets of Morgan Stanley also points to continued support for the dollar against Asia currencies such as the yen, the won and the renminbi.

He adds that hopes of tax cuts and repatriation should help US equities over those in Europe and emerging markets. The strategist is particularly upbeat about US industrials, healthcare and credit cards, but suggests being underweight consumer staples.

The election outcome has prompted global macro strategists at Citigroup, led by Jeremy Hale, to make big changes to their macro asset allocation calls. “President Trump presents new risks, but also opportunities,” they write. “We reverse our preference for [emerging markets] assets and also our preference for government bonds over equities.”

After the big bond sell-off last week, Christopher Wood, who is with CLSA in Hong Kong, says there is “every risk” the correction “continues a while longer, with a lot of technical factors that could come into play in coming weeks.”

Anyone who tells you they absolutely know what will happen under a Trump presidency is probably lying

Kit Juckes, macro strategist at Société Générale, also says that what we know so far “is bad for Treasuries and in turn, more friendly than not for the dollar”. “The overall thrust of all his proposed changes is to boost domestic demand.”

However, Michael Purves, chief global strategist at Weeden & Co, predicts that fixed-income bears may well be reined in. “It is not clear how much fiscal stimulus Trump will really get through Congress,” he writes, adding that yields were “reaching significant resistance levels.

“Given the enormous repression of interest rates, and in particular long-term rates … further sell-offs in Treasuries are likely,” he writes. “However, the pace of the rate increases will moderate.”

Mr Juckes’ mind, meanwhile, is also on the implications for Europe. His note sent to clients on Sunday includes a handy table that lays out important geopolitical dates in the months ahead.

The first arrives next week, when centre-right primaries are held in France. Just two weeks later come an Italian referendum on constitutional reform and the Austrian presidential election. “I’m resigned to the euro trading in the bottom half of the last 18 months’ range against the dollar, until the threat of populist parties gaining power in the eurozone fades,” he writes.

Mr Fels of Pimco also warns about the global political risks ahead. “Too many pundits still tend to underestimate both the extent of the anger with the established political forces and people’s willingness to vote for seemingly extreme candidates or positions.”

As for Mr Trump himself, perhaps the most candid assessment comes from Ms Greene of Manulife. “Anyone who tells you they absolutely know what will happen under a Trump presidency is probably lying.”

Additional reporting by Ben McLannahan, Joe Rennison, Robin Wigglesworth, Mary Childs and Nicole Bullock

Via FT