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Private Equity

USA: Pollsters trumped again!

In recent weeks, we have been asked by many media outlets and many of our investors and stakeholders for our views on the impact of the US presidential election result on prospects for our growth markets. There is little doubt that this has been the most polarizing and tense election that the US has ever seen, with the two candidates having the highest negative ratings of any major party nominees since polling began. In fact, when asked, many Americans will freely acknowledge that they voted for one candidate principally because they did not want the other candidate to get into office. Perverse though it may sound, it is the candidate hated least – rather than most liked – who wins. This is unsurprising when you consider that half the electorate believes one candidate to be a misogynist racist, while the other half believes the other candidate represents the entrenched corruption of the Washington system. Whatever their reasoning, the American electorate has now spoken. Just as with Brexit back in June, the pollsters have once again been confounded by the result, and January 2017 will see Barack Obama replaced by Donald Trump in the Oval Office.

Trump will take office with a strongly polarised electorate – more than any president in the post-war era. Questions will remain for months – if not years – over his legitimacy to govern given his background and lack of public sector experience. In the short term, Clinton’s backers are sure to react with anger and frustration, and Trump’s “deplorable” supporters will have to learn to be gracious winners, reaching out to mend the huge rift in American society that this election has revealed. With the Republicans sweeping House and Senate in addition to winning the Presidency, the Trump administration actually has a greater ability than Obama did to pass landmark legislation on immigration, taxes, infrastructure investment and the like. There is also likely to be upwards of 3 Supreme Court appointments during Trump’s tenure, vitally important to US civil society as Supreme Court appointments will have effects for decades. The question now will be whether issues around Trump’s legitimacy cause fractures amongst his own supporters in the other branches of the Executive, derailing what would otherwise appear a path to effective decision making.

So what does Trump mean for our markets? In the immediate aftermath of the Brexit vote, we highlighted that the referendum result would confirm the existence of significant political volatility in developed markets, and that the prospect of a Trump win at the time seemed less remote. We further forecast that a move to “risk off” in developed markets could benefit emerging markets as investors looked to alternative sources of yield and re-assessed the risk:reward proposition in the rest of the world. With the significant inflows into EM equities and credit seen in the period since June, this forecast seems to have been broadly accurate. But can we say with any certainty that this trend will now continue as the US follows the UK’s lead?

In the short term, we see significant volatility in all markets, and a flight to traditional safe havens as people look to park excess liquidity in gold, CHF and JPY. Hard currency bond yields should also tighten and equity markets will see some sharp declines, mostly as a function of the fact that a Trump win was not priced into yesterday’s market close and traders will be shocked. However, our suspicion is that plenty of traders will view any material decline in equities as a buying opportunity, and that immediate falls may well reverse over the coming weeks. This short term reaction will principally be driven by uncertainty and fear rather than by a sober review of the impact of Trump’s policies. In common with other safe haven currencies, we would expect the Dollar to appreciate against EM FX in the short term, although we see the prospect of a US rate rise in December having receded with this result, and consequently the Dollar may weaken as (and if) it becomes clear to what extent Trump intends to pursue some of the more isolationist trade policies he has advocated during the election.

Trump’s win certainly raises questions about America’s willingness to continue to act as the architect of global free trade, and in the absence of American leadership and advocacy of global liberal values, leaves the prospect of a vacuum, with no country with the credibility to fill the shoes of the US. Mexico is perhaps most vulnerable to a migration of capital from its economy and to a continued collapse in the value of the peso, and whether the wall is physical or virtual, the Trump administration is likely to look to bring some of Mexico’s existing trade surplus with the US back onshore. In addition, the major Trans-Pacific Partnership trade deal is likely to be scrapped, the US will probably seek the renegotiation of NAFTA, and whilst we would not expect tariffs to be imposed in the immediate short term, the nature of the trading relationship with China and other major exporters is going to be reviewed.

So with the rules of trade with the US potentially re-written, the growth markets will need increasingly to turn to other growth markets for support – the South:South axis will become stronger as a result. Later in this edition, we have a focus article on the growing importance of the South:South trading axis. Self-evidently this will not be enough to sustain growth in economies still heavily reliant on feeding the desires of the US consumer, but with 40% of global trade now on this axis, it gives a clear sense of the growing inter-dependency of the nations of the ‘South’ and the gradual reduction in reliance on the US. And as Trump starts the process of finding candidates for the thousand or so political appointments that need to be filled by January, it may well be that we see a change in the tonality of the message from his camp. After all, if the US really wants to bring production back onshore, and at the same time retain the standard of living and levels of consumption made possible by globalisation, it will have to re-engage with the growth markets. Why? Simply because demographics demand it. If the US is to become an exporter again, then it must recognise that 80% of the growth in the world’s middle class is going to come from emerging markets. And even Donald Trump knows that when you promise to “make America great again”, you need to be seen to deliver on that promise, and simply making household goods more expensive by imposing tariffs is unlikely to make many of his voters feel that great.

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