Richard Buxton, head of UK equities, Old Mutual Global Investors:
What will occupy front and centre stage in the first hundred days of Trump’s presidency is his focus on tax reforms. Slashing the corporate income tax rate should unleash significant cash piles currently stored overseas. US companies will, however, see both winners and losers depending on the nature of the reforms designed to favour exports over imports. For Joe Public of Main Street the focus will be on how quickly any policies translate into more secure job prospects and some wage growth, fulfilling one of Trump’s key election pledges.
Two other key – and interlinked – issues will dominate markets thinking during the first hundred days. What will the new administration do in terms of protectionist policies and what role will the dollar play in this? Trump’s recent desire to talk the dollar down eased short-term fears that a stronger dollar could hurt corporate America. Will Trump deliberately attempt to weaken the US currency to put pressure on countries he deems to have artificially weak currencies and big trade surpluses? Or will rising US interest rates support the consensus view that the dollar will remain strong? Could a lower dollar actually force the rest of the world to follow America’s example and raise interest rates? And, if so, what effect would that have on global stock markets? Could the unprecedented eight-year run in global equities be coming to an end… finally?
Ian Heslop, head of global equities, Old Mutual Global Investors:
The inauguration of Donald Trump is a historic event. The change of mood is symbolised as the replacement of Davos Man by Joe Six-Pack.
Trump’s election on 11 November gave support to the bull market in US equities. The market’s positive reaction is based on Trump’s pro-business tax stance and the anticipated effect of his planned massive spending on infrastructure. The change brings to mind the election in December 2012 in Japan of Shinzo Abe, also elected with a mandate to stimulate his national economy vigorously.
Donald Trump’s rhetoric during his campaign may have appealed more to voters’ fears than to their hopes, but investors’ reaction since his election has been of hope rather than fear.
Yet market sentiment can swiftly turn. Here are four reasons why caution is warranted.
Firstly, Trump is unlikely to be successful in winning the support of Congress for all his spending plans. Congress, though also Republican, is far more fiscally conservative than he is. Failure to deliver on his rhetoric could lead to market disappointment.
Secondly, spending on the scale Trump wants could be a double-edged sword, causing not only faster growth but also increased inflation.
Thirdly, Trump’s protectionism could spark trade wars with damaging, recessionary effects.
Fourthly, Trump’s presidency could heighten political risk. Trump’s unfiltered use of Twitter, and his fluid approach to statements of policy is risky.