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Three asset classes and the ‘Trump trade’: Part 2


Donald Trump was elected six months ago and has been US President for four. Share markets around the world have generally performed well and global growth has been solid since he was elected.



But there is certainly potential for volatility in financial markets as a result of seasonal and other factors that tend to prompt share market corrections between May and November.

This is the second in a two-part article series that looks at the effect of the US administration’s policies on three asset classes: equities, fixed interest, and property.

This should assist self-managed super fund (SMSF) investors when thinking about their investment strategies. The first article explored equities and in this article, we look at fixed interest and property. 

Yields rising

When President Trump was elected in November bond yields rose because markets believed he would stimulate the US economy with tax cuts, infrastructure spending and deregulation, which would help drive more business investment. 

This year, bond yields have come back down again as markets realised it will take a while for Trump’s policies to have any real impact. In the meantime, inflation is still fairly low. If he is able to implement his policies this should provide a stimulus to the US economy and result in a renewed upward shift in US bond yields.

However, upward pressure on bond yields is negative for government bond investors because as yields rise they suffer a capital loss. But over time the higher yields mean a higher running yield on a portfolio of bonds and hence the potential for better returns.

For corporate debt, assuming Trump is successful passing his policies, this should prompt more stimulus to the US economy, which is good for US companies. On one hand higher interest rates are likely which means upwards pressure on corporate bond yields. But the risk of default goes down reflecting the stronger economy, which should limit any rise in yields and hence borrowing costs.

Australia will also benefit if the US economy becomes stronger; if US bond yields rise our bond yields rise.

Property market perspective

Compared to bond markets, there will be less of an impact on the Australian property sector from Donald Trump’s policies.

Where at times in the past there seemed to be some correlation between local and US property markets, this is no longer the case. Moreover, there is even little correlation between domestic Australian property markets. For instance the Perth market is dropping, with prices falling back to where they were in 2007. Sydney and Melbourne are very strong, but ten years ago it was all the other way around; Perth was booming and Sydney and Melbourne were softer.
 
Nevertheless, if Donald Trump's policies result in a stronger American economy, this should flow through to a stronger Australian economy. Eventually the Reserve Bank could raise interest rates here, but that's probably a 2018/19 story. The higher interest rates here would weigh on property markets.

So Trump’s policies would be a mixed bag for the local property market. Higher interest rates down the track would be negative for Sydney and Melbourne. But to the extent improving economic conditions would result in stronger commodity prices, this may be positive for property prices in mining affected 
regions such as Western Australia.

Overall, President Trump’s policies would have a much more muted effect on the local property market compared to domestic variables such as interest rate movements. 

Final thoughts

In summary, the ‘Trump trade’ as it is currently defined should stimulate economic growth and be positive for businesses.

There’s a high correlation between the Australian and US share markets in terms of short-term swings. So if Trump's pro-business policies are ultimately passed into law and implemented, this will be good for the US share market and, ultimately, our share market. 

But there is the risk of a correction in equities markets in the short term, especially as strong gains have been made over the last year and since Trump was elected.
 
In the near term, an announcement in coming weeks is likely from the Trump Administration about infrastructure. It appears likely that US states will be encouraged to privatise assets and recycle the proceeds into new infrastructure spending, similar to the Australian approach. This could result in significant opportunities for investors down the track.
 
It is likely Trump’s infrastructure package will rely heavily on gearing up federal spending and public/private partnerships. This should also provide stimulus to markets, which may help support all growth oriented asset classes over time.
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