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US election: What does it mean for investors?

US election: What does it mean for investors?

The election of Republican nominee Donald Trump as the next President of the United States is expected to create market volatility in the short term, while the world waits to see the policy and economic outcomes of his surprise win.

For the second time in 2016, global economies and markets have seen the geo-political landscape rocked.

Britain voted in June to split from the European Union (Brexit) and the US is now adjusting to Trump being elected as the country's 45th President.

Implications of the Trump win are expected to be far reaching - both economically and politically - with Republicans controlling both the House of Representatives and the Senate.

For markets, there are concerns that his criticisms during the campaign of US Federal Reserve chair Janet Yellen could force her resignation.

The Fed meets for the last time in 2016 in December. Forecasts were that interest rates would be raised. The first increase, after almost a decade of monetary policy easing, was 12 months ago.

Currency implications

The Australian dollar (AUD) rallied to 77.62 US cents, approaching this year's high, before the result was announced and rival Hillary Clinton conceded defeat for the Democrats. The Aussie has since weakened against the greenback (USD) to trade around 76.37 US cents on Thursday morning in Sydney.

CommBank currency analysts are tipping AUD/USD to fall by around 5% long term to 74.00 US cents.

Short term, CommBank forecasts the USD to fall against the euro, the Japanese yen and the Swiss franc, while commodity sensitive currencies including AUD are "vulnerable", they said in a note.

Trump has said he wants to change the North American Free Trade Agreement and he also wants to boost fossil fuel production and lift restrictions on oil and gas companies.

Brent oil initially slumped 4% on the news of the election result, but recovered to trade at US$46.36 a barrel, while spot gold held steady at US$1273.50 an ounce.

"Slower commodity demand from China should be offset by strong US commodity demand driven by faster US economic growth," CommBank said, adding that a decline in the AUD could reduce the chances of additional Reserve Bank of Australia cuts to the cash rate, which currently sits at a record low 1.5%.

Market volatility

While early fears of global market decimation if Trump won did not eventuate, there remains concern that a period of volatility will ensue over the coming months.

Following the US election result, the Dow Jones Industrial Average closed up 1.4% and the S&P 500 rose 1.1%, while the Nasdaq ended the session up 1.1%. Japan's Nikkei opened up 6% and the S&P/ASX 200 jumped 3% at the start of today's trade.

"The issue for markets is that they don't know what to expect from a Trump presidency, whereas they thought they understood the alternative," CommBank commodities analyst Tobin Gorey said in a note.

However, analysts were quick to point out that the initial reaction to the Brexit vote was a swift decline in markets the day after, followed by a gradual calming and gains across the major indices over the following months.

Increased US government spending could boost metals commodities prices and bond yields, according to CommSec chief economist Craig James.

What are the risks?

Investors concerned about the possible implications of the US election are being advised to take a long-term view as Trump's intentions for the US become better understood.

"Over time, Donald Trump's policies would, as announced, be highly stimulatory, expansionary and ultimately, inflationary," according to Colonial First State Global Asset Management chief economist Stephen Halmarick.

He sees three phases for the period ahead:

  • Phase One - over the next few weeks - global equities fall, the USD is down against other major currencies and US Treasury bond yields fall, similar to the moves seen after the Brexit vote
  • Phase Two - over the next year - acceleration in the pace of growth of the US economy and a surge in the USD
  • Phase Three - beyond the next year - inflationary implications of Trump's policies are likely to see the Fed raise interest rates much more aggressively than currently priced into markets as inflation takes hold, pushing Treasury bond yields sharply higher

"Within a year or so of President Trump's policies being introduced, the US economy could weaken significantly, perhaps heading towards recession, with the USD, bond yields and the equity markets all likely to decline as well," Halmarick said.

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Past performance is not an indication of future performance.