Initial view: Neil Woodford
As the world begins to consider the potential implications of Donald Trump’s victory in the race for the White House, Neil Woodford shares his initial thoughts on the outcome of the US election.
We’ve had our fair share of political shocks recently but this one, arguably, trumps them all. I am surprised that Donald Trump has emerged as the winner of the US presidential election – not many people saw it coming. This result once again calls into question the ability of forecasters and pollsters to accurately predict event outcomes and capture the extent of discontent and frustration that now prevails across Western democracies.
In that respect, as much as this election result is a vote for Trump, in my view, it is also a vote against the political establishment from a large part of society that is angry that policy has done little to help it since the global financial crisis. It is likely that there will be policy changes now and, although it is difficult to have immediate clarity on what these will be, we should expect a more inclusive domestic growth agenda will emerge.
From a financial market perspective, to an extent, we have a playbook on what happens next, courtesy of the aftermath of the EU referendum in June. Given the relatively muted response from markets thus far, perhaps investors have learnt that there is no need to panic – it was wrong to overreact to the Brexit vote, and in my opinion, it would be wrong to overreact today.
The election result could, however, puncture the love affair that the market has had this year with emerging market equities and debt. Globalisation will come under the spotlight under a Trump administration and I believe we should expect a greater focus on domestic political priorities at the expense of free trade and globalisation.
Having said that, many people will be concerned about what we’ve heard Trump say over the last 18 months of campaigning. As always seems to be case, the constraints of office should mean that what he can actually do as president is likely to be much more moderate. Lots of things that are said on the campaign trail cannot be delivered. The direction of travel on globalisation and trade does appear to have changed but there will be checks and balances on the speed and extent of the more protectionist agenda that may emerge.
In terms of monetary policy, I think the result makes a December interest rate rise less likely. The Fed is likely to have more than half an eye on its role as global financial market policeman and the uncertainty that this election result creates for the global economy and, in particular for emerging markets, could weigh on its policy decision in December.
Overall, I expect the momentum in the US economy to continue. I expect modest growth in 2017, relatively muted inflation and, with the prospect of a slightly more stimulative fiscal policy and the absence of rate hikes, I don’t think a Trump presidency foreshadows a US recession.
Turning to the portfolios, my initial judgement is that Trump’s victory doesn’t change the fundamental assumptions that I have incorporated into my investment strategy. I remain confident in the positioning of the portfolios and their ability to deliver attractive returns over the long-term. Clearly, our significant weighting towards the health care industry has weighed on performance for much of the year, as the market has fretted about the prospect of a Clinton presidency and what that may mean for drug pricing. Now the outcome is known, the prospect of drug pricing legislation is off the agenda. Meanwhile, in California, proposition 61 which would have limited the price of prescription drugs in the State, has been voted down. From a sentiment perspective at least, the news should be positive for this important part of the portfolio.
Thinking more broadly, the US presidential result should remind investors that there is plenty of scope for political surprises. There are several significant elections looming in Europe over the next 18 months, which could be profoundly important for the future of the eurozone project. It would be wrong to assume that America has a monopoly on disgruntled voters and we will keep a very close eye on political developments.
Neil Woodford of Woodford Investment Management is the manager of the St. James’s Place UK Distribution and UK Equity funds. The opinions expressed are those of Neil Woodford and are subject to market or economic changes. This material is not a recommendation, or intended to be relied upon as a forecast, research or advice. Full advice should be taken to evaluate the risks, consequences and suitability of any prospective fund or investment. The views are not necessarily shared by other investment managers or by St. James’s Place Wealth Management.
Please be aware that past performance is not indicative of future performance. The value of an investment with St. James’s Place may fall as well as rise. You may get back less than you invested. Returns on equities cannot be guaranteed.