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President Donald Trump will face three major issues when he takes office, as pre-election rhetoric turns into harsh economic reality, says Robeco’s Lukas Daalder.
The real estate tycoon defeated former US First Lady Hillary Clinton to win the race for the White House on 8 November, and will become head of the world’s largest economy when he is inaugurated as 45th US President on 20 January 2017.
“The first big uncertainty is how Trump will behave now that he has secured the victory,” says Daalder, Chief Investment Officer of Robeco Investment Solutions, whose multi-asset fund has reduced its exposure to equities and high yield bonds, and become overweight in cash. “How much of some of his outlandish calls have been simply election rhetoric, and how much of it will be put into policy action is anyone’s guess right now.”
“Having said that, we think it is very unlikely that he will turn into a moderate overnight. For one thing, Trump’s character and track record does not seem to suggest that he is just a shouter: he will want to show the people that he is an action man as well.”
“The real uncertainty relates to what his exact policy is going to be. We have all seen the statements of Trump, of which there have been plenty. From building a Mexican wall, to prosecuting Clinton; from eradicating ISIS to bringing back jobs from China: he has plenty of options to choose from.”
Daalder believes the post-election reality will come down to three issues:
Daalder says that even if the worst outcomes don’t materialize, investors still face at least a year of uncertainty. “The one thing that is clear though, is that this election outcome has added a lot of uncertainty to a system that was already pretty feeble,” he says.
“In our outlook for 2017, we had a pretty positive view on the world economy – something that we have now lowered. With China and Germany possibly at risk from a trade balance perspective, it is clear that the world economic outlook has not improved.”
“An increase in uncertainty, combined with a lowering of the growth outlook for the world economy at large, means that we think that the risk-reward trade-off for risky assets has deteriorated. From a tactical perspective, we have reduced our exposure to equities and high yield in our model portfolio, and have gone for an overweight in cash.”
“As for bonds, the outlook is more mixed. The higher government deficit, the increase in inflation (linked to possible import tariffs) as well as the threat of selling pressures by the Chinese in case of an escalating trade war, all could put pressures on bonds.”