Skipton Financial Services
Monday, April 24, 2017 - 9:34

The big political shake-up: part one

It has become very difficult to avoid talking about politics. Over the last 12 months, major events like the European Union (EU) Referendum and US Presidential Election have dominated the headlines and fed into everyday conversations. 

Compared to the prevailing status quo that was in place this time a year ago, the UK public’s vote to Leave the EU and Donald Trump’s election victory represent big change. In both the immediate and the medium-term, these events have triggered uncertainty – and that can have a widespread effect.

As the dust gradually settles, we’ll continue to gain more of an idea into what Brexit and Trump’s presidency will mean for the world and, indirectly, our lives. But in the meantime, speculation is able to reign.

Nowhere is this outlook more important than when it comes to our personal finances. Since last June’s EU Referendum, we’ve seen interest rates reduced to a new historic low and inflation – the rate that the cost of living is rising by – reach a two-year high.

 If you have investments, you might be concerned about the impact all of this uncertainty could have on both markets and your returns.

In June 2015 Donald Trump announced he was running for US President. He was a rank outsider, priced at 25/1 to reach the White House. But 17 months later, Trump was delivering a victory speech at the Hilton Hotel in New York, after surprisingly defeating Hilary Clinton to become the US’ 45th President.

 A US election campaign is rarely dull, but this was a particularly high profile battle. Trump positioned himself as anti-establishment and his victory heralds big change in the US. 

One of the key reasons behind Trump’s success was his promise to shake up politics and implement significantly different proposals. His early weeks in charge – where he has attempted to introduce several executive orders – demonstrate a determination to act out his campaign pledges. As the world’s most infl uential nation, the eff ects of the US’ new direction will be felt way beyond its shores.

The early impact on markets

Before change usually comes uncertainty, which stock markets typically don’t react well to. Yet the two months in-between Trump’s victory and his inauguration saw markets continue to rally, with the S&P and Dow Jones – the two leading US stock markets – and the UK FTSE 100 all achieving record highs. Certain sectors, such as financials, have been particularly well-placed to benefit. 

On Friday 20 January 2017, Trump officially took the reins – and the President has been very quick to act on his campaign promises. Initially the US Dollar weakened in Sterling terms, while markets themselves have been relatively flat. But in February Trump revealed he would be implementing significant tax cuts for US businesses which saw both the Dollar and stock markets rally.

Scott Ashworth, Senior Technical Research Adviser at Skipton

Some of Trump’s policies are likely to benefit US businesses and, with it, markets. Trump made his name as a businessman and – since becoming President – he has spoken at length about deregulating industries, revisiting trade deals and implementing tax cuts. 

Although a pro-business strategy would support economic growth, the actions of the US Federal Reserve could infl uence its pace. In February the central bank increased interest rates (it’s now at a range of 0.75% to 1%). The Federal Reserve has forecasted a further two interest rate rises this year. Scott continued, In addition to the tax cuts Trump has talked up increasing infrastructure and fiscal spending. On the one hand this could be seen as a positive for markets, as these actions will further support economic growth; but it might also cause inflation to rise. In this scenario, the US Federal Reserve’s rate rises could have a notable effect as it would increase borrowing costs, which may enter market minds as we go on.

Looking ahead

The other dilemma for investors, and fund managers with international asset holdings, is how the market will react to some of Trump’s other policies. Some industries may benefit, but others could lose out.

 For example, his immigration approach has been strongly opposed by the technology sector, with nearly 100 of the biggest names joining forces to support a legal challenge to Trump’s executive order. Meanwhile Trump’s policies on climate change – which are very diff erent to his predecessor, Barack Obama – could hurt wind and solar energy firms, but might help the cause of oil and coal producers.

“Aside from movements in the US Dollar, markets are proving relatively low key in the aftermath of Trump taking office,” concluded Scott. “At this moment, they are trying to work out if the President’s strategy will support certain sectors and hinder the prospects of others.” 

Donald Trump’s first 100 days in power reaches its conclusion on April 29. The end of the first 100 days is widely seen as the point where we will all have a more rounded idea of the approach he will take for the next four years. It may also bring an end to some of the uncertainty markets have experienced over the first quarter of 2017.

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