In a complete surprise to the market, Donald Trump is set to be the new President of the US. There has been a predictable initial investor reaction with a fall in risk assets and a rally in the safe assets, notes a new report by Emirates NBD.

Given how poorly the two candidates have conducted themselves through the campaign it would be easy to take a negative view of the outcome, said the latest Market Insight released by the leading UAE bank.

Indeed, in the very near term the negative view is prevailing with risk assets down heavily and the dollar down sharply against the Yen. However, now Donald Trump will have both the House of Representatives and Congress under Republican control.

Whilst this does not necessarily mean that they will support every policy he puts in front of them, but it does bring to an end the very fractious relationship between a Democrat President in Barack Obama and the prevarication of Congress on crucial policy initiatives.

The election result could represent an opportunity for the new US President to work with a Republican Congress to advance domestic policies supporting growth. With the Federal Reserve showing little appetite for maintaining low interest rates and expansive quantitative easing other policy tools will be needed to maintain momentum in the economy.

Part of that policy mix includes reforms that reduce the number of regulations that encumber small businesses – something that Donald Trump is committed to.

The divisive bellicose debate between the Presidential candidates leaves a legacy of a US population that has moved more to the extremes of US politics. Indeed as former US state department staffer put it to me recently “I feel I am an extremist” by holding traditional middle ground views.

“We would see a setback in the equity markets a buying opportunity. Although we have reservations about the long term value in equities we do expect economic data to continue to show a relatively robust US economy – something that is normally good news for equity market performance,” the report said.

According to Emirates NBD, as the dust settles investors should focus back on the underlying strengths of the economy.

US equities

•    The aerospace, defence, transportation & Industrial sectors would be the main beneficiaries as Donald Trump has promised a trillion dollars spend in infrastructure on the Pentagon, borders, schools and highways
•    Financials fare better under Republican administrations
•    Slowing capital investment has led to a decline in US growth rates and Donald Trump will encourage companies to invest with tax breaks on new investments.
•    Job creation, higher wages and lower taxes are beneficial for Consumer Discretionary stocks as overall spending steps up.
•    While the development of fossil fuels is supported by Republicans their increased supply may eventually cap oil prices.
•    Managed healthcare is a possible loser as the Obama-care Act could be repealed. The recent sell-off in the managed healthcare sector has already priced in this negative outcome. .

International equities are caught up largely in currency moves, with the large-scale strength of the Yen against the dollar leading to an immediate kneejerk sell-off of Japanese equities. Again, we would characterize these swings as a first-move overreaction rather than something that will necessarily persist over the medium term.

Emerging markets will undoubtedly be nervous, given that Trump has not always expressed the most constructive of foreign policies. However, his focus has generally been much more on domestic issues.

For sure Mexico has been drawn into the mix of domestic issues, however we would take a number of his policy comments on other countries with a pinch of salt until he takes office and sees the practical implications of some of his more outrageous claims. It must be remembered that if Trump takes office he will be the first person who had no military or government experience. Hence, many of his views have been built outside of the political system and based on an outsider’s simplified view of the issues at hand.

However, for the moment the markets may take Trump at his word and hence emerging market assets and currencies could be under some near term pressure.

For GCC equities there will be understandable nervousness about the level of engagement of a Trump administration in solving the complex Middle-Eastern geopolitical issues. In the very near term a much more important factor will be how the OPEC meeting pans out.

Bonds - the immediate reaction has been for US government bonds to rally. Given the volatility in markets, there is a risk that the Fed will back off from raising interest rates at their meeting in December. However, that strength of the bond market may not persist. A decision not to raise rates in December may presage a number of rate rises in 2017. Indeed, by not increasing rates in December the Fed may end up feeling a little behind the curve and hence raise rates quickly and maybe a little further than the market expects in 2017.

There could be some near-term volatility in the US government bond market if Janet Yellen were to decide to step down in the coming months.

“We expect US Corporate investment-grade bonds to benefit with the strengthening of their benchmark US Treasuries. Donald Trump’s proposal of a repatriation tax holiday should also ease liquidity and reduce the need for corporate bond issuance, creating a strong technical backdrop for corporate debt,” the report said.

Current spreads on the US Investment grade bonds should further extend their performance taking valuations to levels seen back in 2014, which would translate into a 30 bps spread tightening from current levels of 140 bps. For the near term, US Government bonds should be well supported alongside Corporate Investment grade bonds.

“We expect to see US high yield bonds eventually to follow suit, supported by a strong economic backdrop. Among sectors, we prefer the US financials, select oil & gas industries, defence, consumer staples and retail,” the report said.

The US dollar is likely to remain the face of the market’s fears on the unknown with respect to Trump Presidency. However, we suspect that dollar strength will be re-established as investors start to focus on the probable path of US monetary policy in 2017. – TradeArabia News Service