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Good relations? | The President, the polls and your portfolio

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Summary

Last week’s American vote matters wherever you invest.

2 min read

The importance of the US on the world stage puts the knock-on effects of last week’s mid-term elections high on investors’ agendas.

The US has the world’s biggest economy and most traded currency. It is currently in good health, leading global growth and market returns in the year to date.

In addition, UK, European and emerging market companies all have meaningful exposure to the US in terms of where they make money. European companies, for example, generate 16% of their revenues from America.

Any policy changes that affect the US economy could make a huge difference to investors. So all eyes turned stateside last week when Americans went to the polls. And we saw President Trump’s position weaken as the Republicans lost the House of Representatives to the Democrats.

 

Business as usual for investors

This is a good result for investors. We don’t see it leading to any significant changes in US economic policy, and by extension to markets. Both could even benefit from the fact that one factor of uncertainty has been removed from the equation, making their trajectory easier to judge.

And history shows that, when the mid-terms lead to each party controlling part of the government, it’s typically good for markets. That said, nothing of course is ever guaranteed.

A more important risk for us right now, which we monitor closely, is the US Federal Reserve’s (Fed) push to raise interest rates. Ebullient growth has seen the Fed tightening policy to keep the economy under control to avoid the bust that could follow the latest boom. They have raised rates eight times since 2015 – three times this year – and are expected to do so again before 2018 ends.

This dichotomy between the government’s drive to boost the economy and the Fed’s efforts to control it makes the US interest rate outlook tough to get a grip on. Investor fears of an overly aggressive programme have triggered two periods of market volatility this year, in February and in October. While we don’t see it as a real risk to company profits, market sentiment means it is something we are continuing to monitor.

Coming back to the political landscape, for us there are three key areas worth mentioning concerning the impact of the mid-terms: trade, tax and spending.

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“Lower corporation tax rates are boosting US companies’ profits and bolstering their share price. That’s good for shareholders.”
Lilian Chovin, Coutts Investment Strategist

China trade war rumbles on

President Trump’s weaker position shouldn’t make much difference to either country’s negotiating position.

Politicians from both the Republican and Democratic parties back being tough on Chinese trade and protecting US jobs. It’s a popular policy among American voters. The Democrats are therefore unlikely to interfere in White House negotiations. And even if they did, President Trump has executive power on trade policy so can follow his own path.

Meanwhile, China has had its share of set-backs, too. The country’s economic growth fell to its slowest rate in a decade at the end of October, as the government attempts to rein in high levels of debt and the effects of President Trump’s tariffs take hold. It therefore remains in their interests to resolve the situation.

Our view on the trade war remains unchanged. While it represents genuine cause for concern among investors, we believe the healthy US economy will absorb any impact while China will counteract any risks with economy-stimulating policies.

 

Tax cuts are untouchable

President Trump’s tax reforms have been a big boost to the US economy and are likely to remain so.

Lilian Chovin, Investment Strategist at Coutts, explains, “His fiscal stimulus has certainly contributed to the current positive economy. Wage growth reached a multi-year high in October which, when combined with the tax cuts, means people have more money in their pockets to buy more goods and services. That’s good for the economy. Lower corporation tax rates are boosting US companies’ profits and bolstering their share price. That’s good for shareholders.

“The Democrats’ increased power is unlikely to change any of that that. They cannot reverse what’s already in place, they can only block any further tax cuts.”

He adds: “This all means that the US economy, the world economy and investors will continue to benefit from strong consumer demand in the US for the time being.”

 

Shared support on spending

Another area to watch is public spending. While partisan politics has the potential to put a spoke in President Trump’s policy wheels, in this case, the Democrats and Republicans appear to agree on the need for an increase in infrastructure spending.

The debates on funding can reach fever pitch in the US, and even lead to a government shutdown – so there is a real risk here – but it’s encouraging to see some common ground between the two parties. And such spending can be very positive for the long-term growth of the US – and therefore the world – economy.

Past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.

About Coutts Investments

With unstinting focus on client objectives and capital preservation, Coutts Investments provide high-touch investment expertise that centres on diversified solutions and a service-led approach to portfolio management. Our investment process is as disciplined as it is creative – ensuring tailored solutions with robust results.

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