“Trump Testing” our view of the world

The US election result raises the likelihood of a major fiscal stimulus in the country with the potential to provide a significant boost to growth resulting in higher inflation and further strengthening of the US Dollar. However, we believe the outlook of low growth and low inflation remains true beyond the US, as the above policy is unlikely to be mirrored in regions such as Europe given current political realities and resistance to pro-cyclical policies. We therefore expect the status quo of ultra-loose monetary policy aimed at tackling low growth rates to continue outside the US.

So, while the cyclical outlook for the US economy has changed, the global economic picture remains muted, in our view, and the drivers of this secular stagnation remain broadly unchanged. Furthermore, while the exact stance Trump will take on trade/immigration policy is as yet unknown, we expect trade stagnation rather than trade reversal, prompting a more nuanced view on emerging market dynamics going forward. That said, we believe that structural changes in emerging market economies, including steps to reduce their reliance on exports and an emphasis on domestic demand, will help these markets to weather any potential storm.

Our assessment of the key challenges facing bond investors – as discussed in our recent paper “A new paradigm in fixed income markets and implications for portfolio management”
– remains broadly unchanged by the Trump victory: 
Interest rates are likely to remain low/negative outside of the US given the weak economic backdrop and reliance on monetary policy measures to boost growth
Increased market risk associated with, among other factors, longer duration in portfolios was in fact underscored by the market volatility witnessed post the US election
Similarly, the extent to which liquidity is fractured was also brought into sharper focus after the US election. A new risk factor is looming on the horizon: the prospect of populism-led political outcomes in Europe. This is something we will be following closely.

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Emerging markets securities may be less liquid and more volatile and are subject to a number of additional risks including, but not limited to, currency fluctuations and political instability.
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