BNY Mellon on the inauguration of Trump as US President

High yield debt, and particularly the US dollar market, performed strongly following Donald Trump’s surprise US election victory. Markets are optimistic about the prospect of potential fiscal stimulus in the US, corporate tax cuts and a relatively lax regulatory environment across a range of sectors…..

John Bailer, Portfolio Manager, The Boston Company Asset Management, part of BNY Mellon IM

Ulrich Gerhard, Senior Portfolio Manager, Insight Investment, part of BNY Mellon IM

……For example, companies related to construction or infrastructure build have performed well as markets anticipate a more favourable environment for the sectors under the Trump administration, whilst healthcare and pharmaceuticals underperformed significantly due to potential investigations into pricing. At the same time, the outlook for US economic growth looks supportive and default rates are likely to be lower this year, with weakness in the metals and mining sector largely played out – the sector has also seen additional support from the recent oil producer agreements to cut production.

However, uncertainty remains a dominant theme, with few concrete details on the incoming administration’s policies, and confusing signals on a range of issues from geopolitics to global trade. Also, if there is a material boost to the US economic outlook, the Federal Reserve could react by raising rates at a faster pace than currently expected. We believe these issues present markets with significant uncertainty, which is likely to lead to continued volatility within higher-beta assets, including the high yield market.

We believe a short-dated approach to high yield has the potential to benefit from the tailwinds of US policy, while being better placed to mitigate – and benefit from – volatility associated with policy uncertainty. Short-dated high yield assets can offer inherently low interest rate risk, and from a credit perspective, a high degree of cash-flow visibility which can help increase the probability of repayment.
Paul Hatfield, Global Chief Investment Officer, Alcentra, part of BNY Mellon IM
The market has reacted positively to Trump’s win. Stocks have already priced in a lot of the benefits expected from growth of infrastructure spending and the new regime’s more business friendly stance.  It remains to be seen how much of this growth and deregulation Trump will actually be able to deliver, so I think it is right that markets have recently taken a pause for breath ahead of Friday’s speech. 
With higher US growth likely and the probability of 3 rate increases from the Fed this year leading to further strength in the dollar, I expect emerging markets to continue to see outflows although stable commodity prices will mitigate some of the pain.  Floating rate assets like loans should continue to see increased demand, while bonds, particularly in the investment grade sector, will suffer badly, given their already very tight pricing.  

Given how much optimism is already priced in and with trump’s tendency to shoot from the hip on pronouncements and policies, I expect continued volatility throughout the coming year, as surprise actions and statements from Trump add to already growing geo-political tensions.  Any disappointment in what Trump delivers on the growth and deregulation front will exacerbate market swings.   This will present buying opportunities for those who are brave enough and have cash on hand at the right time. 

Brendan Mulhern, Global Strategist, Newton Investment Management, part of BNY Mellon IM
Stock-market performance in the wake of the US election result suggests that investors in general expect higher real economic growth and inflation from ‘Bidness Man Trump’ and the scions of finance and industry that make up his pro-growth administration. However, it is important to recognise that markets were already in risk-on mode well before Trump’s victory, pricing in higher real economic growth and inflation in response to the improvement in the global economy.

A so-far favourable interpretation of Trump’s proposed policies has enabled markets to build on the momentum that was already in place. If considered in isolation, there is a possibility that Trump’s policies, if implemented as proposed, will be reflationary for the US – potentially even inflationary – at least for a while. But the reality is that very little of Trump’s proposed tax reforms, fiscal stimulus or other potential policies will be enacted before the fourth quarter of 2017 at the very earliest.

As we move into the New Year, we believe investors should be focusing on the likely outcomes for liquidity, both in the US and at the global level, between now and late 2017. The backup in global bond yields, the appreciation of the dollar, and the more than 100% rise in the oil price since last February’s lows mean that the economic tailwinds of 2016 have dissipated, and instead we are entering headwind territory. Economic activity is likely to slow going into 2017.  Positive economic surprises are likely to tail off and the plug may be about to be pulled on the headlong rush into cyclical areas of the market.

John Bailer, Portfolio Manager, The Boston Company Asset Management, part of BNY Mellon IM
Brexit markedly lowered global growth and interest rate expectations. As a result, company managements for US Financials focused on cost-cutting and strengthening their balance sheets. We believe US Financials are the cheapest sector and growing the fastest. During third-quarter earnings season, 76% of S&P 500 companies beat earnings estimates. While the average beat was 5.6%, Financials beat estimates by 8%. Additionally, the third quarter was the first in over a year to show year-over-year EPS growth for the S&P 500, largely due the impressive 13% growth in Financials.

President-elect Trump could add additional fuel to the fire. If he deregulates the Financials sector, it could remove a massive growth overhang. Expansionary policies, like increased fiscal spending, could also encourage rate increases. Financials are largely domestic and would benefit most from corporate tax reform, with estimates that a 20% federal corporate tax rate would drive earnings higher by approximately 18% on average. After undue punishment since the financial crisis, headwinds are turning to tailwinds, and we believe US Financials are fundamentally stronger, undervalued and poised for a comeback.