As the transition of power gets underway after the U.S. election, the markets have gone on a dramatic run with expectations and sentiments catching up to the new reality of a Trump administration. Of course, it is too early to determine what truly lies ahead, but in a year where political events have shaped sentiment and fixated markets, we thought it would be valuable to highlight key themes that could potentially develop as a result of the US election, particularly from a securities lending perspective.
U.S.: In the coming months, we will see how policy proposals from the Trump campaign platform are translated into tangible plans. Until then, we expect continued volatility and uncertainty. The GOP control of the White House and both chambers of Congress appears to provide Mr. Trump with the ability to advance conservative priorities on tax rates, fiscal policy and global trade.
A key theme that will likely dominate is the relative strength of the dollar and overall exposure to foreign exchange fluctuations. Although a strong dollar policy will set a tone of global confidence for the new administration, it is also likely that it will create an undesirable feedback loop and make exports more expensive, placing increased pressure on revenues and margins. Multinationals who earn a significant amount of revenues outside the U.S. will likely feel the currency pressures. Importers to the U.S., such as European car manufacturers, will see a welcome boost that will likely drive increased sales in the region, but at what expense to the domestic industry? Talk of tax cuts could help stimulate demand, but the question will be how to best to stimulate the domestic industry in the face of increasing imports buoyed by a strong dollar.
In addition, sentiment around the energy sector has only increased over uncertainty related to the president-elect’s plans. Some commentators already believe that a likely scale-back in regulations coupled with encouragement for drilling activity would keep oil prices low due to global oversupply, potentially placing pressure on individual companies in the sector. Separately, a strong dollar will likely create headwinds for oil companies because it inflates the cost of their product and weighs on demand. Furthermore, the alternative energy sector will be bracing itself for an uncertain future following the election given the President elect’s skepticism over global warming. The market could see a challenging environment for this sector as federal tax incentives for solar and wind are at risk under the new administration.
Lastly, in the financial sector, the expectation is that a Trump administration may scale back some of the more onerous regulations on the financial industry including parts of Dodd-Frank and the DOL Fiduciary rule. Combined with rising interest rates, this would be a welcome relief for the sector and could have a positive effect on trading volumes as it would likely increase investors’ capacity to express their conviction if restraints are eased.
With Clinton’s sights set on eliminating price gouging in the industry, the biotech sector likely breathed a sigh of relief as the election results rolled in. Not so the sectors whose margins are likely to come under pressure as a Trump administration seeks to repeal parts of the Affordable Healthcare Act and bring more competition to the industry. Healthcare insurers and hospitals will be among the sectors where a rise in borrowing demand would not be surprising.
Europe: Beyond companies exposed to the risks of a stronger dollar, the impact of a Trump administration on the region is harder to determine although coming on the heels of Brexit, attention is focused on whether the tide of nationalism will continue in Europe. With Italy going to the polls in early December and French elections at the start of next year, there is little doubt that this will lead to increased volatility and will potentially increase demand to borrow securities as investors identify dislocation and market opportunities.
There is also a sense that a shift from monetary stimulus to fiscal expansion might lead to more normalized equity markets and an increased ability to express short conviction as a whole. It is more likely that the focus will remain on the already identifiable trends, with the continued emphasis on a fragile banking sector and increasing concern related to the re-emergence of inflationary pressures, particularly in the UK, which likely have a cooling effect across multiple sectors.
Asia: For the large part, many commentators quickly pointed out that Asia will be most impacted by the Trump administration. The key themes are consistent with a focus on domestic policy, and an acceleration in U.S. growth rate could lead to a rise in interest rates and a subsequent selloff in Asian and emerging markets. Talks of trade tariffs would likely impact Chinese exporters and Japanese automakers who manufacture overseas. Then, of course, there is the potential impact of currency wars that could result in further devaluation of currencies as authorities look to offset any tariff impact, which could increase volatility. Specifically, there could be an uptick in lending demand for renewables and solar manufacturers following the removal of U.S. subsidies. Coal and steel producers could be a lending sector of interest, as it is likely the U.S. administration will impose tariffs on imported steel and coal. Separately, clothing companies and manufacturers that source products in Asia will likely be hurt by a strengthening dollar because their contracts with suppliers are based in U.S. dollars.
So what’s next? Over the days and weeks to come, we will learn more about what a Trump administration will look like and what his priorities will be when he takes office early next year. For now, the president-elect’s victory introduces an unprecedented element of uncertainty into the economic and financial markets. We largely expect the core themes to prevail in the securities lending markets but also believe the result will likely be a significant catalyst for generating new trade ideas and producing new securities lending opportunities.
Note: Published with acknowledgement to the recent article, ‘Strategy Insight: The Day After’ written by Scott Clemons, Chief Investment Strategist at BBH.