Given the events of the week we thought it timely to provide you with some commentary and perspective on the US election result and closer to home the RBNZ’s announcement yesterday of another rate cut to a now record low for our Official Cash Rate of 1.75%.

RBNZ Official Cash Rate announcement

Key highlights: 

  • Global inflation remains weak
  • Political uncertainty remains heightened
  • Market volatility is elevated
  • NZ exchange rate remains higher than is sustainable
  • Strong domestic growth is supported by strong population growth, construction activity, tourism, and low interest rates
  • House price inflation remains excessive and is posing concerns for financial stability. Although house price inflation has moderated in Auckland, it is uncertain whether this will be sustained given the continuing imbalance between supply and demand.
  • Rates to stay at 1.75% until end of 2018 with 20% chance of rates being cut again during this period.

For more detail on Reserve Bank Governor Graeme Wheeler’s OCR announcement & view on the US election click here.

US Election

This year will be remembered for two major and unexpected political events, BREXIT and Wednesday night’s US election.  

After a seemingly long and difficult campaign Donald Trump has been elected president of the United States with the Republican Party retaining control of the House, and the Senate, in Congress. Just as we saw with the Brexit vote, the combination of rising inequality, stagnant middle incomes and the disenchantment of white non-college educated males has seen a backlash against the establishment and helped deliver victory for Trump.
It was a noisy 48 hours leading up to the election on Wednesday and this was to be expected, "It seems like we're setting up for a 'buy the rumour, sell the news' reaction," CNBC wrote in a Tuesday afternoon note. Meaning whatever the outcome, it was to be a bit of a lose-lose situation. "The market should now pull back no matter who wins ... it will just pull back more if Trump wins." But as we have seen through Thursday, this was short term. With Wednesday afternoon experiencing a free-fall in the Australasian Markets, Thursday turned to a rally & losses have been quickly recovered.

Over the past 2 days, we have tuned in to a selection of fund managers & economists both domestically & overseas to understand the implications of this election & how this may affect you.
The last 18 months, we have watched & listened to two personalities playing out their electoral shows on stage – geopolitically important but a high degree of theatre for much of the time.

Trump’s key policies

Taxation: Trump promises significant personal tax cuts including a cut in the top marginal tax rate to 33% from 39%, a cut in the corporate tax rate to 15% from as high as 39% and the removal of estate tax.
Infrastructure: Trump wants to increase infrastructure spending.
Government spending: Trump wants to reduce non-defence discretionary spending by 1% a year (the “penny plan”), but increase spending on defence and veterans.
Budget deficit: Trump’s policies are likely to lead to a higher budget deficit and public debt.
Trade: Trump wants to renegotiate free trade agreements and has proposed various protectionist policies, eg; a 45% tariff on Chinese goods, 35% on Mexican goods.
Regulation: Trump generally wants to reduce industry regulation, which would be good for financials and energy.
Immigration: Trump wants to build a wall with Mexico, deport 11 million illegal immigrants, put a ban on Muslims entering the US and require firms to hire Americans first.
Healthcare: Trump wants to repeal Obamacare and allow the importation of foreign drugs.
Foreign policy: Trump wants to reposition alliances to put "America first" and get allies to pay more, would confront China over the South China Sea and would bomb oil fields under IS control.
 
The majority of the above (albeit Walls & Bombs) will actually provide a much needed boost to the US economy. Short term, the combination of big tax cuts and increased defence and infrastructure spending will provide an initial fiscal stimulus and, with reduced regulation, a bit of a supply side boost to the economy. Long term, this will blow out the budget deficit and the risk is that his protectionist policies will set off a trade war, and along with much higher consumer prices and immigration cut backs will boost costs. All of which could ultimately mean higher inflation and bond yields and a faster path of Fed rate hikes in the US.

Beyond the initial reaction, share markets are likely to settle down and get a boost to the extent that Trump’s stimulatory economic policies look like being supported by Congress, but much will ultimately depend on whether we get Trump the pragmatist or Trump the populist. Congress, along with economic and political reality, can probably be relied on to take some of the edge off Trump’s policies to some degree, but this would take time. But a more pragmatic approach by Trump to economic policy would probably see the initial market reaction present investors with a buying opportunity.
 
While Trump’s victory will come as a bit of a shock to many, there is a good chance that economic realities and the checks and balances provided by Congress will see his policies become more pragmatic. A good initial guide to this will be what sort of advisers Trump appoints around him. And remember there was much concern a “Yes” Brexit vote would be a disaster for shares and the global economy. What actually happened was an initial knee-jerk sell off but after a few days global markets moved on to focus on economic fundamentals and shares rallied.
 
We are constantly reminding clients in weeks like this, to trust the Investment Risk Profiling work we have completed with you and the solid investment research we receive which provides you with high quality, well-diversified portfolios.

As always, please don't hesitate to contact our office if you have any questions or if you would like to meet for a review.

Kind regards

 

Steve Morris
Principal

 

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