Markets have been optimistic about President-elect Donald Trump, but uncertainty remains a “dominant theme” ahead of his inauguration, according to BNY Mellon company Insight Investment.
Multiple sectors, particularly those associated with construction, are set to benefit from the fiscal stimulus, tax cuts, and “relatively lax regulatory environment” proposed by Mr Trump, Insight Investment senior portfolio manager Ulrich Gerhard said.
Additionally, the outlook for economic growth in the US looks supportive, and default rates are expected to decline through 2017, Mr Gerhard said, but he cautioned that markets still lack clarity on certain policy areas.
“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,” he said.
“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.”
Alternative investment firm QIC also cautioned that though markets are optimistic, their relationship with Mr Trump has fluctuated regularly.
“Since the race to the presidency, financial markets have been in a love-hate relationship with Donald Trump,” the firm said.
“Donald Trump has stoked the ambiguity of this relationship by at times presenting as the pro-growth/conciliatory ‘Good Trump’, while on other occasions presenting as the anti-free trade/divisive ‘Bad Trump’.”
QIC said Mr Trump’s protectionist stance toward Mexican and Chinese trade relationships poses a risk to investors, noting that a trade war could have a stagflationary impact on the economy.
“Protectionist policies such as tariffs and cuts to migration would lower the potential growth rate of the US economy, while simultaneously driving inflation higher as tariffs lift import prices and the fall in the labour force increases wage growth,” it said.
“A trade war, sparked by 45 per cent and 35 per cent tariffs on Chinese and Mexican imports respectively, would cost the US economy around 3 per cent of GDP over Trump’s first, and possibly only, term of presidency. Even though US growth would be weaker, the annual rate of US inflation would be pushed above 3 per cent, inducing the Fed to accelerate monetary tightening in the process.”