12 November 2018
Michael Lai, Vice President of Wealth Management Malaysia, Member of OCBC Wealth Panel
President Donald Trump is in for a rude awakening.
Remember last week, when we spoke about Republicans losing some influence over the US government in the upcoming mid-term elections, and how President Donald Trump will be having a tough time moving forward?
Well our crystal ball was spot on, and very much in line with the rest of the markets. The Democrats managed to wrest away the majority from the Republicans in the lower house of Congress. We expect the shakeup in the US government to bring some balance to the policymaking process, where previously Republicans have blindly fast-tracked Trump’s aggressive agenda despite protests from various groups.
Potential Outcomes & Implications: Base Case Prevails.
Fiscal Stimulus | Trade Tensions | Strong Dollar | Interest Rates | Risk Assets | |
Base Case Dem House / Rep Senate |
Neutral | Neutral | Neutral | Neutral | Neutral |
Status Quo Rep Sweep |
Neutral | Neutral | Positive | Positive | Positive |
Disruption Dem Sweep |
Negative | Neutral | Negative | Neutral | Negative |
Source: Bank of Singapore 31 October 2018
Democrats in Action
Here are some issues which we believe the Democrats will touch on in the coming months:
› i – For Impeachment.
Since the Russian investigations and Robert Mueller coming into the scene, the i-word has been thrown around. We are not keen to speculate about the possibility of this taking effect, but the Democrats do have the simple majority to begin the process of removing the president.
We think that impeachment proceedings will largely depend on Robert Mueller’s investigation to the Trump-Russia collusion in the 2016 presidential elections. Democrats have been mum so far, as the bits of news and rumors are not actionable, but that may change if the Mueller’s investigation yields damaging information.
› All Things In Moderation
President Trump managed to squeeze through a number of legislations in the past year, with the help of the Republican majority in Congress. Trump pushed back ObamaCare, passed massive tax stimulus, fought hard against immigration and punished China and other trade partners for allegedly taking advantage of the US.
All this was done with the blessing of the Republican Party and has caused volatility and uncertainty in the global capital markets. A stronger Democratic voice in Congress will moderate the more aggressive polices from the Trump administration, potentially creating the opportunity for unity in the global economy and foster healthier growth rates.
› Spending Cuts?
Perhaps you haven’t heard? US budget deficit jumped 17% from the previous year, due to Trump’s tax overhaul. While Republican’s have preached about practicing fiscal prudence, they seem to have let the ball drop this round.
While we don’t see Democrats cutting down on spending yet, there is a possibility that their priorities will clash with the Trump administration. We suspect that in the coming months, Congress will be pushing for the return of more welfare spending by the Federal government, which was previously repealed by the Republicans.
Watch out! Tussles between Trump and the Republicans against the Democrats to pass the spending bill in December could result in a government shutdown, if neither party yields on their agenda. Trump has already played this card before to get his way, and we see the possibility of this happening in the future.
Key Risk – :
We prefer not to speculate on the mess that is politics and instead focus on the economy itself. So far signs have been encouraging, with Trump’s stimulus pushing growth to 4.2% and 3.5% in the second and third quarters of this year, above median estimates.
Stronger growth has been the main driving factor behind the US Federal Reserve’s rate hikes since 2015. The central bank has suggested that it will continue hiking interest rates gradually in tandem with economic performance. This year, there has already 3 hikes and we are expecting 1 more by the year end.
But 2019 becomes more difficult. While labor cost is above the 2% inflation target, the Democrats coming into power may moderate Trump’s policies that are focused on boosting the economy (for the short-term), thus reducing US economic momentum. As growth dwindles, the US Fed will have less of a reason to hike interest so aggressively. While our base case of 4 hikes for 2019 still stands, the outlook is more cloudy now that Congress is now blue (the US Democrats are the blue party). Nonetheless, we hold to our view that equities remain the asset class to outperform in this late cycle environment. Investors will do well to stay invested with a diversified portfolio.
So How To Participate In This Market – :
The US is still one of our preferred investment destinations, given that economic performance has been encouraging and earnings outlook remains positive for the coming year. However, we think that investors need to be ready to stay invested for the longer term in order to ride out politically induced market volatility.
In this late cycle environment, equities continue to be the preferred investment vehicle, simply because the upside is more attractive. Additionally, since the market dip from earlier this year, equities are trading at a significant discount, which provides investors an attractive entry opportunity, with a sufficient margin of safety.
On bonds, rising interest rates are limiting the appeal for investment grade fixed income, so we continue to prefer investing in high yield bonds, where the higher coupons provide sufficient buffers to investors’ portfolio. Additionally, we welcome the consistent income component from bonds, amidst an environment of increase volatility.
Important Information
This material is not intended to constitute research analysis or recommendation and should not be treated as such.
Any opinions or views expressed in this material are those of the author and third parties identified, and not those of OCBC Bank (Malaysia) Berhad (“OCBC Bank”, which expression shall include OCBC Bank’s related companies or affiliates). OCBC Bank does not verify or endorse any of the opinions or views expressed in this material. You should beware that all opinions and views expressed are subject to change without notice, and OCBC Bank does not undertake the responsibility to update anyone with any changes to the opinions and views expressed.
The information provided herein is intended for general circulation and/or discussion purposes only and does not contain a complete analysis of every material fact. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Without prejudice to the generality of the foregoing, please seek advice from a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the investment product. In the event that you choose not to seek advice from a financial adviser, you should consider whether the product in question is suitable for you.
OCBC Bank is not acting as your adviser. This material is provided based on OCBC Bank’s understanding that (1) you have sufficient knowledge, experience and access to professional advice to make your own evaluation of the merits and risks of any investment product and (2) you are not relying on OCBC Bank or any of its representatives or affiliates for information, advice or recommendations of any sort except for specific factual information about the terms of the transaction proposed. This does not identify all the risks or material considerations that may be associated with any of the investment products. Prior to purchasing the investment product, you should independently consider and determine, without reliance upon OCBC Bank or its representatives or affiliates, the economic risks and merits, as well as the legal, tax and accounting characterisations and consequences of the investment product and that you are able to assume these risks.