Donald Trump is to be President of the USA

A few years (or, maybe, even months) ago such a statement would have seemed preposterous.  Indeed, this morning’s media described it as a ‘shock’ result.  I would like to consider the context of the result and the possible effect on your investments in this short letter.

First: the result.  Those who have heard me over the past few months are aware that I am not shocked by this result – I considered that a Trump victory was a strong possibility given how his campaign appeared to galvanise his supporters and the clear and effective strategic planning of his campaign.  Indeed, The Donald was, perhaps, the weakest link in an otherwise effective campaign. Could it be that behind the campaign mask lies a shrewd businessman?

I am surprised, though, that the media have been, once again, wrong-footed. Brexit was, in part, an anti-establishment vote.  Trump appears much the same. Perhaps the media should pay attention to grass-root feelings and report reality rather than, perhaps, their desired outcome.  This explains the use of the word ‘shock’: it was not the vote that they wanted.  Perhaps democracy is alive and kicking after all, albeit providing results that the cognoscenti dislike.  Is a democratic decsion, however unpalatable and mis-guided, better that one foisted against the will of the majority of the people?

Ultimately, I am reassured that the founding fathers of Congress built-in safeguards against mavericks that become President.  It is unlikely that some of Trump’s more outlandish and grotesque pledges shall see the light of day.

Second: the effect on the investment markets.  Initially, the dollar and stocks weakened only to revert rapidly to their equilibrium.  Indeed, given that the President’s effective power is limited in the short term I would expect more volatility but no systemic weakness.  Indeed, US investors are famously perma-bulls and might deduce that the intentions to increase spending (particularly on infrastructure) is good for equity valuations. The fear is, though, that Trumpism damages the US economy in the long-term through excess debt and a destruction in credit-worthiness leading to an increase in the risk premia of US assets.  The actions of the Fed are critical and it remains to be seen how that institution shall look under Trump.

More problematic, though, is the effect of The Donald overseas.  Emerging markets, whose economies are linked closely to the US and the dollar, are nervous about the prospect of trade tariffs.  If enacted and a full-blown trade war develops this spells serious implications for equities and US GDP. 

In Europe, Trump’s success comes at a bad time for the global ambitions of the EU.  Again, expect volatility to increase.  The worry for Europe is Trump’s misguided alliance with Putin; that said, Trump may be able to speak Putin’s language (metaphorically, of course) and temper the otherwise revanchist foreign policy of the Kremlin.  

Trump’s Islamophobic posturing could lead to a weakened relationship with the Gulf states, in turn strengthening Iran leading to further destabilisation of that region.  The obvious impact is an increase in the cost of oil.

At home, we can expect to continue our close relationship with the US – increased US spending should provide opportunities for the many UK businesses that operate in the US.  The fortunes of the FTSE100 index are inexorably linked to the dollar and support requires continued dollar strength.  Given Trump’s policies this seems a less likely outcome in the short to medium term unless the US increases interest rates.

In summary, it is impossible to predict the consequences of yesterday’s election since we do not know how The Donald shall behave in the White House. However, Trump is unashamedly pro-business and this just might make the US an even better place in which to do business.  For us who watch at a distance it seems that we require the establishment to take order – an ironic outcome of an anti-establishment vote.  Democracy has spoken and we must learn to live with the decision of the proletariat.

I commented post Brexit that the approach of this firm is to avoid knee-jerk reactions and to make only long-term considered investment decisions. Portfolios are structured to weather storms by combining a broad geographical base, a variety of asset classes and stock selection.  The forthcoming weeks and months are likely to be a testing time for investors and advisers.  We shall do our utmost to guide our clients through the noise and identify the trends and opportunities that emerge.

Andrew Longbon, Director

For, and on behalf of, Longbon & Company