Alternative assets are likely to benefit from regulatory changes, increased market dispersion and volatility owing to President Trump's policies.
Alternative assets could be one of the main beneficiaries of a ramp up in volatility owing to the economic policies of the newly inaugurated Donald Trump as President of the United States of America, according to Nicholas Brooks, chief economic commentator for the Intermediate Capital Group (ICG).
The election of Trump as well as the Republican sweep of Congress came as a surprise to most investors and arguably potentially marks a watershed change in US domestic, trade and foreign policy.
As a consequence, assets with limited correlation to public equity and fixed income markets , long investment time horizons and/or the ability to arbitrage regulatory change and take advantage of increased market dispersion and volatility will likely be best positioned to perform in this environment Brooks says.
While it is too early to assess the full implications of Trump’s administration, a few policy areas are clear.
“The first is that he is likely to push ahead with an aggressive tax and regulation cutting agenda with the support of a Republican Congress,” Brooks said.
“The second is that he is likely to be far more interventionist in domestic economic and foreign trade policy than has been the norm. Lastly, if recent “tweets”, cabinet appointments and rhetoric are indicative of his likely behaviour once in office, political and policy uncertainty will rise,” he said.
Despite the rhetoric, however, Trump will be constrained in his ability to run large deficits by a sizeable existing US debt burden and an economy near full capacity. The US federal debt is now 76 per cent of GDP, which means it is running at its highest rate since 1950.
“When Reagan entered office in 1981, debt to GDP was only 25 per cent and the economy was just exiting recession. Now, after over 6 years of continuous expansion and the unemployment rate at a 9 year low, the US is running near capacity,” Brooks said.
In this situation, he says, bond markets are unlikely to react well if Trump substantially increases deficits from current levels.
“Independent CFRB estimates indicate his plan would push US debt to 105 per cent of GDP by 2026, unacceptable to most investors and Republican fiscal hawks in Congress. All in all, this points to a highly regressive, but corporate-friendly policy mix to continue for years.”
“A budget policy that hews closely to the House Republican “Better Way” blueprint seems likely. Areas of agreement include cutting corporate, income, estate and capital gains taxes; cutting back Obamacare, financial and energy regulation; boosting infrastructure and defence spending.”
Bond yields and the US dollar will likely rise in the first part of 2017 on healthy US economic growth, but he says external factors will limit increases and potentially reverse some of the gains later in the year.