A Republican sweep has emerged, against our expectations, bringing transformative-policy risks to the fore. Given that Donald Trump has eschewed the more traditional, well-known policy experts within the Republican Party, many details about the staffing of his future administration are unknown. Accordingly, we watch next for key cabinet appointments, which could shape his policy priorities regarding regulation, healthcare, and trade.
With Trump’s win, we expect investors to act defensively in the near term.
Uncertainty will hurt risk assets near term. Trade-exposed currencies are likely to weaken; yield curves will get steeper; the banking and pharmaceutical sectors may outperform; municipal bonds are likely to weaken.
Medium term: Anchoring to realpolitik means a path for risk assets to rebound. Cutting through the uncertainty of the Trump policy agenda, we focus on two likely areas, given the motive and opportunity to act: a tax-cut-driven "accidental" stimulus and increased trade protectionism. This policy set introduces both upside and downside to risk assets, and reactions could be very policy-specific.
How could pro-growth tax policies and anti-growth trade policies coexist in a Trump presidency? The answer is simple: realpolitik. Congress writes the tax laws, and their tax plans largely agree with Trump's. Meanwhile, the president has significant autonomy on trade.
Given the uncertainty, we position for several policy themes:
- Trade policy: Open Asian economies, such as China and South Korea, and their currencies could feel the brunt of uncertainty.
- Tax-reform-driven stimulus: Long corporate credit and taxable munis are preferable to tax-exempt munis. We would also expect steeper yield curves and higher rates volatility.
- Lower regulatory risks: We expect the pharmaceutical sector to outperform. Meanwhile, financials could sell off in the short term, but we would also expect outperformance in the medium term.
Adapted from the Morgan Stanley Research commentary “Electing Uncertainty" (Nov 9, 2016). Ask your Morgan Stanley representative or Financial Advisor for the latest coverage on the U.S. election and market outlook. Plus, more Ideas.
