Eaton Vance
November 10, 2016
Eaton Vance provides advanced investing to forward-thinking investors, applying discipline and long-term perspective to the management of client portfolios.

Global equities likely to regain poise after Trump win

Christopher M. Dyer,  Director of Global Equity

London  - Although the immediate reaction by global equity markets to news of Donald Trump's election win has been to reduce risk, market weakness may be short-lived.

Initial reaction in European and Asia Pacific markets is understandable. The policies of the new president lack clarity and there is particular uncertainty with regard to mid- to long-term implications for global trade, given the strong protectionist rhetoric that was a central focus of the Trump campaign.

However, similar to the resilience seen in the aftermath of Brexit, equity markets may soon regain their poise. With the support of a Republican-controlled Congress, President Trump is likely to introduce measures that will be welcomed by the equity market in the short-term. These include lower tax rates, a path to repatriate overseas cash for U.S. companies, and a fiscal stimulus program to rebuild infrastructure.

Companies exposed to this infrastructure spending will clearly benefit. The repatriation of cash may lead to an increase in acquisitions of smaller U.S. biotech and technology companies. Until now, the value of large amounts of cash held overseas by some companies has been discounted in equity values due to the cost of repatriation. These discounts are likely to shrink.

The much-maligned pharmaceuticals and biotech sectors are the biggest beneficiaries today, and this may continue, as investors breathe a sigh of relief that pressure on drug pricing is likely to be less under Donald Trump than it would have been under Hillary Clinton.

Looking further ahead, predictions are difficult given the many geopolitical and economic uncertainties we face. Since Trump is an unknown quantity in geopolitics, the risk premium here rises. Protectionist measures discussed in Trump's campaign, if enacted, would be a drag on global trade and growth, but the effects of this (like the economic impact of Brexit) are unlikely to be felt for several years. Earlier this year, I wrote: "The U.K. vote to exit the European Union ushers in a new era of uncertainty that is likely to persist for some time. The significance of this event cannot be understated from political, economic and social perspectives." The election of Donald Trump is the next milestone of this era of uncertainty.

What is clear, however, is that the financial crisis of 2008 has evolved into a genuine identity crisis. In the U.S. and the U.K., we see populations which are evenly and bitterly divided on the desired leadership and direction of their nation. Large segments of the electorate are disaffected and have voted for anything but the status quo.

Over the next year, there will be greater clarity in Europe on how this identity crisis plays out: Italy votes on a constitutional referendum on government reform, and elections are held in France, the Netherlands and Germany. Don't bet on the status quo. The results of these votes will have important implications for the future of the European Union and its global relations.

Bottom line:  Despite initial global equity market weakness, the envisaged introduction of tax reform and fiscal stimulus measures are likely to lend support to the market in the near-term. Infrastructure-related companies and pharmaceuticals / biotech stocks are likely to fare relatively well in the near term. A key wildcard for stocks is uncertainty surrounding the possible introduction of U.S. protectionist measures and the mid- to long-term implications of this for global trade.

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