Investors ponder effect of a Trump exit

If the US president were to resign or be impeached, the consequent impact on his planned tax cuts is seen a major risk for equity portfolios.
Investors ponder effect of a Trump exit

The chances of Donald Trump staying in power seem to fluctuate as frequently as he tweets.

In mid-May, after it was reported that the then FBI director James Comey had been pressured to shut down the investigation into the Trump team’s possible collusion with Russia, the odds of the president’s departure in 2017 were 4 to 1, according to Betfair, the world’s largest online betting exchange. It is now offering odds of 7 to 1 on the same event and of 4 to 1 that he will leave next year.

Whether these shifts are down to official investigations or the president's proclivity for public outbursts, investors' views vary widely on whether Trump is good or bad for portfolios.

Tax impact 

A key potential area of impact on markets is the administration’s proposed tax cuts. At the end of May, Trump announced plans for heavy cuts to personal and business income taxes and a reordering of the tax code, though he is yet to flesh out the details.

“The big risk is that the market has priced in some probability of tax cuts, and a scandal [uncovered by the Russia investigation] might reduce the likelihood of those going through,” said Anthony Brown, a partner at Mercer Investments in New York.

However, he noted, if Republicans can get the cuts passed this year or early next – presumably before the investigation is finished – then any eventual impeachment might not matter. Robert Mueller, a former FBI director, was appointed to head the investigation into links between Russia and the Trump campaign in May.

Nonetheless, investor confidence that Trump’s proposed cuts will materialise is waning. Frank Lee, acting chief investment officer for North Asia at DBS Bank in Hong Kong, believes there is little hope of them going through, adding to his fears for US stocks.

“[Impeachment] is a risk for the investment market, especially the overvalued US equity market. The possibility of passing the economic stimulus (e.g. tax reform) in Congress is low in the coming months,” he said, adding that DBS was underweight American stocks. 

Mercer’s Brown agreed that, after strong gains in prices lately, many investors seemed concerned. “If we don’t get something on taxes by early next year, the market would be set up for disappointment,” he noted.

Following an 18% rise in the 12 months to mid-June, the S&P 500 was down around 1% in the two weeks to July 3.

Volatility to fall?

However, others take a different view.

Trump departing would be positive for US risk assets as long as it did not trigger a presidential election, argued Sandor Steverink, head of treasuries and inflation-linked debt at Dutch pension manager APG Asset Management.

“In general, Trump creates volatility,” he noted. “As long as the [Republican] party remains in power in both houses, then the impact [on risk assets] would be positive”

APG has no strategy prepared as a response in the event of the president exiting, said Steverink. If anything, Trump’s replacement by Vice President Mike Pence would result in the same fiscal plan, without the uncertainty associated with Trump, he added. 

Steverink said APG had been “quite active in our positioning immediately before and after the presidential election”, concentrating efforts in credit and equity markets. He declined to specify portfolio allocations.

Infrastructure impact

Meanwhile, some might worry that Trump’s pledges to boost infrastructure spending might be threatened if he were to depart. Washington announced a $1 trillion initiative last month, for instance.

However, the head of investment solutions at a big Asian insurer, who has invested in US infrastructure, said such opportunities predated Trump’s election and would continue even if he left.  

“There will be a lot of infrastructure and new energy projects in the US,” he noted. “I don’t think [what happens] around Trump will affect these. A lot of projects were budgeted before Trump was elected. Also, these projects are done by different states, not the federal government.” 

There is at least one thing that many would presumably agree on: the Twittersphere would be far quieter in Trump’s absence.

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