Trump elected as US President – how might this affect investments?
Analysts from Guardian Wealth Management look at how this may affect world markets
The American public has spoken and declared the Republican nominee Donald Trump as the next president of the most powerful nation in the world, in what has undoubtedly been one of the most turbulent and scandalous election races ever.
With such a shock result and with any change in political direction creating uncertainty, the result will undoubtedly affect world economies and ultimately, the investments of residents in the UAE and the Middle East.
‘When the U.S. sneezes, the world catches a cold’.
Hamzah Shalchi, Regional Manager at financial planning firm, Guardian Wealth Management, reviews the predicted financial impacts.
Stocks
In the run-up to the election, when it became clear that the result was no longer a given, markets had begun to react and thus, both stocks and bonds moved lower. How markets will react in the coming days and weeks is unsure but Barclays predicted that the S&P 500 would nosedive by between 11 to13% in the event of a Trump victory.
However, it is important to remember that investors’ immediate reaction to U.S. elections often don’t last. For instance, when Obama was elected, the S&P 500 Index dropped around 4% in the week following the result, only to rise again by almost 10% some 90 days later.
Bonds
The U.S. benchmark 10-year yield has only recently recovered from the 39 basis points fall inflicted by the Brexit vote. Now experts believe the benchmark could slip at least 10 basis points again although Trump’s planned tax cuts and infrastructure-spending could, in time drive them back up.
Energy industry bonds are likely to rebound after two years of major losses, thanks to Trump’s public support for fossil fuels.
History tells us that the stock market performs better under a Democratic President. Over the past 100 years The Dow Jones Industrial Average has produced average returns of 82.7% under a Democratic president, compared to the 44.8% average returns under a Republican government.
Currencies
As Trump continued to gain on Clinton in the election results, the US dollar began to fall against the British pound, euro and Japanese yen and this is expected to continue as uncertainty hits the market over fears about his policies.
For example, immediately in the hour following the election results, the US dollar plummeted by around 4% only to recover slightly post-Trump’s victory speech.
By voting for the unpredictable, inexperienced and somewhat unconventional Trump, the US has essentially taken a giant leap into the unknown and historically such moves have a negative impact on the relative value of currencies.
As the UAE Dirham is pegged to the USD, it is likely to be impacted by the fluctuation against other developed currencies such as the British Pound and Swiss Franc.
Emerging Markets
Citigroup sees the MSCI Emerging Markets Index immediately falling by at least 10 percent.
In Asia, China will bear the brunt of risks if Trump wins whilst Southeast Asia exporters will be severely affected, especially companies in Singapore, Thailand, Philippines, Malaysia and Vietnam.
India and Indonesia will be least affected by Trump’s victory. The valuation premium of India is likely to sustain due to positive structural drivers such as strong growth and improving fiscal deficits.
With Trump’s strong link to Russia, Russian equities will likely rise.
Commodities
In times of uncertainty, nothing glitters quite like gold. Investors looking for safe-havens often turn to precious metals such as gold, silver and platinum when the value of the dollar falls against other currencies.
Additionally, natural gas prices will fall and oil prices could get a lift.
Conclusion
Whether it’s a slight ripple or giant shockwaves, investors can be certain that whatever happens next in the US will impact the whole world.
The US dollar is used in more than 85% of foreign exchange transactions which means that when anything happens to the US economy it usually has a significant impact on global finances.
“With a series of elections and other political decisions fast approaching in Europe, now is a good time to assess how protected your investments are in the face of increasing market volatility”, comments Hamzah Shalchi, Regional Manager at Guardian Wealth Management.
“It is incredibly difficult to predict what markets will do next at the best of times, however remaining invested through periods of volatility can provide stronger returns than attempting to second guess what will happen and ultimately missing out on the markets best days.”
“A diverse investment portfolio doesn’t guarantee a profit but it can reduce your exposure to volatility. Under normal investing conditions, when there is an appetite for risk in the market, Stocks go up and Bonds go down. Conversely in periods of uncertainty, investors seek refuge in Bonds as they look for lower risk options. Rather than opting for one or the other and hoping for the best, investing in both allows you to manage your risk while still maximising your returns throughout periods of volatility”, explains Shalchi.
