US Election: Another World Order

The following was taken from the J O Hambro Capital Management Price Discovery Webinar. Fund Managers Ben Leyland and James Syme weigh up what a Trump Presidency might mean for international markets

What have we found out in the short term?

 
Ben Leyland “What is generally believed to be the case now is that the US government has a strong mandate for a clearly spelled out program of domestic reflation, stimulus and  reindustrialization. And that is to be achieved through some combination of tax cuts, tariffs, deregulation and anti-immigration policies and certainly the immediate market reaction played to those themes. We’ve seen the dollar up, we’ve seen us rates up, we’ve seen the outperformance of US domestic banks, mid caps outperform large caps.

“France had a fairly unsuccessful election in the summer. The UK has just gone through a poorly received budget process. Germany just seen its coalition government collapse. Japan has just replaced the Prime Minister and the LDPs lost the election again. So you’ve got quite a lot of political uncertainty elsewhere and in the US you’ve got a lot of, let’s say, political certainty at least for the next two years with a clear agenda of America first.

How much of this was already priced in?

 
Ben Leyland “ The big thing to emphasize is this doesn’t feel like 20 16. 2016 was a big shock with the Brexit outcome and then the election of Trump for the first time. This time, we’ve been through a Trump presidency before. He’s been quite clear what his policies are and I’ve never paid particularly much attention to pollsters and things like that. But the markets have started to price in a Trump presidency at least since the middle of August. We obviously had the Kamala Harris honeymoon period and then since the middle of August, markets have started to price those things in. United Airlines has more than doubled in two months. US banks are up 25% in the same period for example.
 

What were the surprises?

 
James Syme “I mean certainly Mexican equities up on the day of the result was not, I think not a first order thinking would lead you to expect. I think the other thing to remember about emerging markets is our view and what underpins our process is the view that emerging markets go right or wrong at the country level, but the rest of the world keeps going. We have had this week interest rate decisions in various emerging markets today. We’ve had a chunky inflation print out of Brazil. We’ve had a lot of news around Chinese stimulus. The rest of the world keeps going, this is a factor, it’s not the only one.
 

How does the strength of the dollar impact emerging markets?

 
James Syme “A stronger dollar in high US rates tends to be negative for emerging economies and for emerging equity markets, and that’s because emerging markets are essentially capital dependent and as economies and as markets perform most strongly when they’ve got capital flowing into them. So while you’ve got a lot of confidence in the US fiscal and monetary policy setup, then a more reflationary, inflationary US is going to be a drag on them.

On the other hand, a country with a very large fiscal and trade deficit that is also starting to mess with its monetary policy credibility could lead to quite a significant weakness in the dollar, and that creates an enormous opportunity for some of the larger, more liquid emerging markets currencies and bond markets to be the beneficiaries. If you’re sitting there in the Arab Gulf with huge foreign exchange reserves and you start allocating them out to the US dollar, how much euro do you want in the current setup? How much sterling, how much yen? Once you’re past those, you’re going to be looking at China, India, South Korea, Taiwan, maybe Southeast Asia as places to put those reserves, and that would be extremely stimulating for emerging markets.

What are the long term consequences of a Trump Presidency and how will this impact AI?

 
Ben Leyland “ Trump’s been quite clear, he wants to deregulate the evolution of AI in the US and in a sense that’s good because it allows the private sector to drive innovation and that generally seems to be a good thing. The problem is that with every successive wave of technology, it seems to me that the importance of regulating it carefully from the outset becomes more important because the consequences of badly bad regulation become more severe. Regulating PCs wasn’t very important. Regulating the internet probably was quite important, for example. AI is seen generally as an improver of productivity, as tremendous human innovation,  a tool that we can all benefit from. I do however think it has its darker side which needs regulating carefully.

What happens if the US steps back from its role as the world’s banker and policemen?

 
James Syme “I think it creates a lot of opportunity for larger emerging markets. The two that look the strongest place would be China and India, and you can think about that in terms of if the United States isn’t interested in enforcing the safety of shipping in the Indian ocean then India will, maybe that’s where we’re headed. When you think about it from a kind of corporate and technological point of view, China is clearly the world leader in electric vehicles and is clearly the world leader in solar power. TikTok is number one globally in its class. Temu is becoming number one globally in its class. Tencent is a monster in gaming and has huge online players globally, not just in China. The effect of a US withdrawal from the rest of the world opens up enormous opportunity for the rest of the world to interact with itself. Major emerging market players will be a significant part of that story.
 
Ben Leyland is Fund Manager – JOHCM Global Opportunities and JOHCM International Opportunities
 
James Syme is Fund Manager – JOHCM Global Emerging Markets Opportunities