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Long-term data shows that since the end of the second world war, US government expenditure growth has generally been higher under Republican administrations. Sarcastically put, Republicans seem to be fiscally conservative only when it comes to thwarting Democratic spending plans. Trump grandiose election promises to double the rival candidate’s infrastructure investment plans is therefore politically credible in principle.
Market conditions are favorable, as the US dollar is strong and interest rates are still at very low levels - even after the most recent surge, the ten-year US treasury bill yield is still hovering around the levels of December 2015, when the Federal Reserve decided to proceed with its first and thus far only policy rate hike. Furthermore, with most other major central banks buying back their national bonds, other liquid, low-risk government bonds remain in relatively short supply globally. In short, in addition to being willing to accept larger budget deficits, the US would also be able to borrow in its own currency. And when Trump’s first post-election statements sounded conciliatory, markets were immediately relieved. The expectation for more deficit-funded growth and inflation in the near future is credible for the following reasons in particular:
Overall, Trumps election can be viewed as an unexpected easing of US monetary conditions, which naturally gave equities and inflation expectations an additional instant boost. At the same time, however, at least part of this de-facto easing was offset by the strong rise in US bond yield and the USD since the election. We therefore caution against chasing the markets. Instead, in the con-text of our existing tactical asset allocation, we would generally favor a more counter-cyclical investment approach. This is particularly true in the case of emerging market equities, which have been sold off too strongly since the US election in our view.
Note: The next LGT Beacon will be published on 14 December 2016.