The election of Donald Trump in the U.S. presidential race was a surprising outcome that can be viewed as a rebellion against the policy consensus of the past 30 years.
In terms of the election impact on the markets, the victory of an antiestablishment candidate introduces greater uncertainty and risk, and the shift toward single party control of the White House and both houses of Congress is a departure from the bipartisan, divided government model that markets typically prefer. On the flip side, looser fiscal policy could act as a stimulus to growth, and deregulation may benefit sectors such as financials, healthcare, and energy.
However, the election has not changed our core outlook for diminished global growth prospects, as we continue to view this era as a period of secular stagnation driven by demographics. In this environment, GDP expectations are constrained relative to traditional benchmarks of healthy economic expansion; 2% growth is the new 4% for U.S. GDP.
While our outlook remains intact in this regard, Mr. Trump's election could provide a catalyst for several trends that we expect will play out as the shape of his presidential administration and his agenda comes into focus.
Three key trends that we expect are:
- Reduced globalization and trade—Antitrade sentiment was a recurring theme of presidential campaign rhetoric, and Mr. Trump' s voice was the loudest. He has maintained that trade agreements typically result in fewer jobs and lower wages for U.S. workers. Historical evidence suggests that this has not been the case, but we acknowledge that, with globalization, a small proportion of the labor force is often hurt profoundly. Further, the United States has not done a good job of assisting this segment of workers through skill training and income support. Even before Mr. Trump' s election, protectionists had already succeeded in beginning to turn back the globalization clock. Over the past eight years, protectionist policies have expanded globally and, in our view, this proliferation has helped to bring about the longest period of trade stagnation since World War II. Mr. Trump' s ascendancy is likely to extend this period, and the degree of further stagnation depends on what his intentions are in terms of renegotiating or canceling existing trade pacts, such as the North American Free Trade Agreement, and in increasing tariffs against countries such as China and Mexico. Such outcomes could trigger renewed global trade spats, with a detrimental impact on the global economy and financial markets.
- Looser fiscal policy, a more hawkish Fed—Mr. Trump's proposals to increase government spending on infrastructure and to cut corporate tax rates are likely to create an environment of looser fiscal policy, which would likely act as a stimulus to growth. In addition, the tax reforms would likely lead to the repatriation of large levels of corporate cash stuck abroad. This influx would likely boost the levels of dividends, buybacks, and debt reduction. Mr. Trump's appointments to the Federal Reserve Board, where there are two open seats, would likely turn it more hawkish, leading to a greater likelihood for an accelerated timetable for interest-rate increases. This tightened monetary policy is likely to exert downward pressure on equity market valuations, sending price-to-earnings ratios lower as interest rates rise. For investors, this would increase the importance of focusing on companies that can deliver results through the other two components of equity return, dividends, and earnings.
- Emboldened populist movements—Trump' s victory could serve as a further catalyst to the populist momentum that has recently emerged in Europe and in the United Kingdom, as evidenced by the uproar over immigration issues, the election of antiestablishment figures, and the passage in June of a U.K. referendum to exit the European Union. We will be closely watching two upcoming events that could offer signs as to how far reaching the impact will be on Europeâ s political landscape: a December 4, 2016, Italian referendum on constitutional reforms proposed by Prime Minister Matteo Renzi and French national elections scheduled in May 2017.
Coupled with the current lower levels of global growth, such an environment would likely be challenging for equities; however, a strategy that focuses on sustainable dividends and cash flows should be well positioned to hold up, in our view. As global equity managers, we look for companies that not only pay attractive and growing dividends, but also consistently create shareholder value through buybacks and debt reduction. Amid periods of slow growth or elevated market volatility, each of these three elements of shareholder yield is underpinned by growing cash flow that can help companies ensure ongoing growth of their businesses as part of thoughtful capital allocation processes.