With Andrew Bascand on a company research trip in Denver, Colorado, he has shared his on the ground views of the US mid-term election results and their implications.
My impression is that the US equity markets are fairly sanguine following the US election result because right now it is not about the politics – the economic data remains helpful and on track for the economic expansion to continue through 2019. The mid-terms outcome seems to have hit the mark that most observers expected. As a result, we have witnessed a relief rally of sort; the tail risks of a clean sweep by the Democrats did not happen, nor did a total swing the other way. Commentators in local papers say that Trump’s immediate reaching out to Nancy Pelosi for a bi-partisan approach may be a reflection of the result being more of a tie than a win for either Democrats or Republicans.
So right now the US fiscal stimulus continues to work its way into jobs, wage growth and both business and consumer confidence. In this respect, Trump and the Democrats have a lot in common: with an agenda of spending more on infrastructure, and a tendency to borrow more.
How the US Fed reacts will be a key focus. Our expectation is that the US Federal Reserve remains on its slow steady path of removing monetary stimulus, so long as the economic expansion remains in place. In this sense, the market may be behind the curve, not the Fed.
With trade tensions a continuing issue to resolve, there is growing hope of some type of deal between the US and China ahead of the G20 summit. However, China and the US are on totally different timetables. Trump wants a pro-US growth deal ahead of his Presidential Elections. By contrast, Xi is focused on progress to 2025 and well beyond.
Looking at the impact of the mid-terms on equity sectors, the infrastructure names look to benefit from greater public spending plans, the financials may be at risk due to anti-bank sentiment from the Democrats, and the large tech stocks may again come under some questioning particularly around tax. It is difficult to recommend either a risk-on trade across all equities or any specific changes in stock recommendations. If anything, there is an offsetting headwind from liquidity continuing to drain from markets (with new data showing further sales of US bonds by the PBOC).
In the longer term, local media in the US have highlighted the continued divisions in the US along so many lines: women versus men, millennials versus retirees, Hispanic versus white, and coastal versus the middle states. The Republicans have tied themselves to Trump and growth, and voters’ top concerns are no longer the economy, they are healthcare and immigration. In the election, the Democrats possibly made good long-term gains with many younger candidates and women making it into the House. For now, however, Trump will switch his focus to the Presidential election cycle and growth, that is why commentators suggest he will move to strengthen growth oriented policies, and try to do a deal with China (further tariffs are inflationary and risk higher interest rates and slower growth).
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