The Daily Update - Is US growth a certainty under a Trump administration...?

As the world continues to recover from the ‘surprise’ outcome of the US presidential elections, the hangover seems to have eased somewhat with asset markets broadly bouncing off the knee-jerk induced lows, into US close of business yesterday and through today’s session, at time of writing. Although the yield on the 10-year US Treasury has backed-up slightly since the election announcement, it remains below levels witnessed at the beginning of the year, at ~2.1%.

Trump’s emphasis on fiscal policy includes expanding infrastructure spending. Although nothing will transpire overnight and the wheels of change will grind slowly, with little economic impact until the latter end of 2017 and into 2018, the potential infrastructure boost has seen industrial metals outperform with copper taking the lead; 3 month futures are up ~11.5% so far this month. This will no doubt give a further boost to Southern Copper 7.5% 2035, a holding within our global portfolios, which is already up ~30 points from the lows in January. The Baa1 rated bond continues to offer exceptional risk-adjusted expected return of over 20% with a very attractive yield of 5.12% and 4 notch credit cushion.

Many see Trump’s policies as ‘pro-growth’, however, we are unsure whether deploying huge fiscal stimulus at a stage when the economy is near full employment is a good idea. Instead we expect hunkering down on the country’s huge budget deficit could prove more beneficial for the economy. His mandate also includes a review of trade and immigration policies; considered thorny issues these have been the principal drivers of US growth over the past couple decades. We wonder whether attacking the two most important engines of growth could actually sabotage what is left of potential US growth.

China was a focal point in Trump’s campaign, as such the US-Sino relationship will be closely watched as Trump looks to ‘confront’ the world's second largest economy in an attempt to, for example, reshape trade agreements. The recent shift in the Chinese economy to a more sustainable consumer- and services-led growth model coupled with China’s increased global clout this decade could actually make it hard work for Trump to exert his ‘influence’. For one, Trump wants to do away with Obama’s TPP free-trade agreement which was seemingly designed to single out China and boost US trade relations with the rest of Asia. Also, with the current uncertainty, Trump’s relative inexperience in such a top level role coupled with his potentially detrimental strong pro-US views (with little consideration for the rest of the world, especially his neighbour Mexico) one wonders whether his policies will alienate other nations and push them towards China. Some of America's largest companies, for example Apple produce the majority of their products and parts in China so negotiations will be watched very closely.

With so many unknowns, it is clear that markets are finding it very difficult to make a call at this juncture, for this reason we expect asset classes will continue to swing about. We therefore believe that having a suitable mix of AAA positions alongside the credit spread component is the best way to be placed currently.

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