Trump’s election merits caution as postcrisis consensus comes to an end
KUALA LUMPUR: Donald Trump’s spending plans have the potential to accelerate US recovery but could rebound later if debt servicing costs rise sharply, says Aberdeen Asset Management Asia.
As the president- elect assembles his team it is still unclear which Trump will show up at the White House: the pragmatist or the populist.
So far US equities have responded positively whereas bonds have sold off, while the dol lar has recovered strength.
This is in response to Trump’s programme of infrastructure stimulus and tax breaks.
But head of Asia Pacific multi-asset investments, Irene Goh, says there are plenty of risks to the gathering reflation consensus.
These are both economic and political.
“For example, higher borrowing costs could offset the benefits of fiscal spending, given an already substantial debt load, resulting in slower than expected US growth,” she said in a statement yesterday.
“But if bond markets see the Federal Reserve falling ‘behind the curve’ that could turn ugly if wages do not respond to higher prices.
“Aberdeen’s base case is for a rate rise next month with two each in 2017 and 2018. Trump’s proposed tax cuts appear to be unfunded at present and the possibility of future spending cuts to pay for the tax measures may begin to loom larger in markets’ minds over time.”
Speaking at an outlook presentation, ‘Augmented Reality’, Goh is reasonably positive on US equities near term given a strong earnings season and firm enough balance sheets.
She is mindful of political disruption in Europe while monitoring closely and evaluating the balance of global policy influences on emerging markets, where recent search for yield has led to nervous extreme dollar strength that may be unhelpful to both the US and emerging markets.
“Meanwhile, further Yen weakness and reflationary expectations are likely to support Japanese equities.
“The ‘ tough one’ is where to position with respect to interest rates. If inflation is about to return then bonds are unattractive, with investment grade an already crowded trade.
“Indeed, with Trump taking office in January, this is not the moment to take excessive risk. But any sign of market overshoot willprovide a new entry point.”
Lastly, Goh is neutral on industrial commodities due to opposing forces of potential support from infrastructure spending and the currently less than favourable demandsupply dynamics. If commodity prices should recover in due course, it would help provide support to emerging market currencies in general.
“We are reasonably confident that under Trump the US could engineer growth in the short term, since there appears to be broad support for his growth and employment-supportive policies,” Goh said.
“But one should be vigilant in weighing the benefits of that against the potential untoward side- effects of rising prices.”