Trump on the Brink – Geopolitical & Market Implications

Politics

• The uncertainty around Trump’s political agenda and the possible increase in protectionist measures could weigh on global trade and ultimately dampen the global economic outlook, favouring bonds over equities

• It is likely there will be panic amongst Nato allies in the Baltic states as Putin may decide to use Donald Trump’s friendly relationship to position troops in the region

• In Europe in 2017 there are elections in France, the Netherlands, Germany, Austria and potential for an election in Italy. In these regions many populist parties are either leading or rising rapidly at present leading to further market volatility in 2017

Currencies

• Currency vigilantes are likely to act. A sharp fall in the USD will result as uncertainty over trade and foreign policy jumps.

• Rising FX volatility is another negative for the GBP. GBP moves inversely to volatility and will likely sell-off against major currencies. JPY and CHF will be the big gainers under a Trump Presidency.

• MXN will experience a sharp fall as anti-Mexican sentiment from Trump is likely to depress investor optimism about the future of NAFTA and the benefits that accrue to Mexico from free trade.

Equities & Gold

• President Elect, Donald Trump has been critical of loose monetary policy and is likely to seek a new governor with a more hawkish outlook when Yellen’s tenure is complete. Investors are likely react negatively to this monetary policy uncertainty.

• Furthermore, US equities are trading at a 50% premium to their long-term cyclically adjusted valuations, making them more vulnerable to a sell-off. Consequently, some equities are likely to hit their limit down (5% fall) and therefore have trading suspended.

• A weak USD is likely to benefit the S&P100 as 50% of revenues are derived from abroad, although, in the shorter-term they are likely to decline too. A Trump win is likely to drive gold prices higher as investors seek a haven asset in a similar manner to what we saw during Brexit. Gold miners will likely benefit as they have a 2.4x beta to the gold price.

• Donald Trump has pledged $550bn of infrastructure spend, having control of both the House and the Senate means he has a higher chance of getting these proposals approved. Industrial stocks that maintain civil infrastructure are likely to benefit from higher opportunities for government projects under Trump.