Skip to the content

What Trump’s potential policies will mean for credit investors

08 December 2016

Insight Investment’s Adam Whiteley looks at some of the proposals made by Donald Trump during his election campaign and analyses what impact they might have on credit portfolios.

By Jonathan Jones,

Reporter, FE Trustnet

Credit markets sit in the balance following the election of Donald Trump as US president, according to Adam Whiteley, portfolio manager at Insight Investment. During the campaign, the president-elect made a number of pledges diverging from existing US policy across a range of areas.

“Whilst we know there is a lot of hype and a lot of expectation, right now there’s very little detail [on his policies],” he said.

The portfolio manager says Treasuries had become too highly valued in the run-up to the election and that the subsequent fall is more of a rebalancing than a reaction to the result.

Indeed, while the composite BAML US Treasury index has risen by a modest 1.08 per cent this year, the chart below shows some of the volatility in the market and fell by 1.81 per cent between Trump’s election and the end of November.

Performance of BAML US Treasury index in 2016

 

Source: FE Analytics

“That doesn’t mean markets are starting to try and price in some of what they expect the policies to be,” Whiteley said.

“What I would say is that the sell-off in government bond yields that we’ve seen post-Trump had already begun before the US election outcome – this is not a new thing.”

However, a number of policies outlined by Donald Trump during the campaign trail could potentially have lasting effects on markets.

“Really you can break it down into five elements – monetary policy, fiscal policy, regulation, immigration and trade,” the manager said.

“Some of those will potentially have positive effects for economies and markets, some will be negative but more interesting will be the time horizon over which they’ll take effect.”

Fiscal policy

More importantly will be Trump’s stance on fiscal policy, which is widely assumed to become looser very early into his tenure as president.

“Whether it’s a big infrastructure spending program or if it’s a reduction in tax rates - corporate or income - that’s likely to have quite a short term impact compared with some of the more out-there trade and immigration policies,” Whiteley said.



In terms of the credit market, he says a reduction in corporation tax would have an immediate overnight boost to the bottom line of most companies based in the US.

“Clearly that is good for profitability and it will also increase equity valuations you would think and that gives us a bigger cushion as a credit investor for when things go wrong,” he explained.

Whiteley says proposed infrastructure projects will benefit a number of sectors and is certain to boost top-line revenue as well as bottom-line profits.

Also of interest to credit markets will be a potential amnesty for bringing back onshore a lot of the cash that is held outside of the US, he says. Currently offshore cash is estimated at around $2tn.

Whiteley added: “Now not all of that has to come back onshore but what we do know is certain sectors have been coming to the bond market to finance dividends and share buybacks rather than using that overseas cash.”

“If they can bring that back onshore then issuance may well go down next year and with lower supply that ought to be good for valuations.”

“They may however just pay that out to shareholders but at the very least there will be some marginal benefit if that policy comes to fruition.”

Monetary policy

Moving to monetary policy, Whiteley says the Federal Reserve will look very different 18 months from now, with Trump able to elect two new members when he takes over as president, as well as its new chair when incumbent Janet Yellen’s four-year term ends in 2018.

“We’ve heard during the election campaign some interesting views about how monetary policy should be conducted,” the manager said.

“We know that employment markets were getting closer to full capacity in the States and with that wage pressures are starting to build.”

“So really what the fiscal side of things might do is turbo-charge what we’ve already seen and if you’ve got a looser fiscal policy you don’t need as tight a monetary policy.”

“Very simplistically for credit markets, if we’ve got higher yields, the cost of borrowing goes up – all else being equal – but when you think about investment grade in particular, companies tend to have quite a long average maturity in terms of their debt profile.”

“So whilst rates might go up for 2017 it will take a long time for that to feed through into an overall average borrowing cost.”


Regulation, Trade and Immigration

“On the regulatory side there is certainly some discussion around a lighter touch approach and that he will repeal some of the banking laws,” Whiteley said.

“The administration gets to elect certain leaders of certain regulatory bodies and if you’ve got lighter regulation you might expect a higher return on capital.

He says this should particularly benefit banks, which have been absolutely hammered from the equity side in recent year thanks to tighter regulation.

“But from the credit perspective it’s great because they’ll be more utility-like, more boring, and safer institutions,” he said.

In terms of trade, Trump represents perhaps the biggest anti-globalisation stance made by voters this year.

With some radical policies, including the shelving of the Trans-Pacific Partnership and tighter controls on imports from China, trade is likely to be a major topic of discussion during Trump’s presidency.

“Less importing means higher inflation as costs go up to buy those goods and products. That hurts exporters,” he said.

“If you look at the S&P 500 a huge amount of revenue stream from there comes from outside the US. That potentially hurts those companies.”

Labour markets are also likely to suffer if some of the outlandish immigration policies unveiled by Trump during the election campaign are pursued.

“If you’ve got wage costs going up people that employ a lot of labour will have lower profit margins which will ultimately lead to less cashflow generation and less money for companies to service debt.”

“Trade and immigration policies - they may be slower to come through but they will have some more negative consequences over the longer run.”

However, Whiteley says trade and immigration policies will have a larger impact on equity valuations relative to credit valuations.

“An equity investor gets to own all of the upside and all of the downside, whereas credit investors are more interested in having ongoing coupons, getting their principle back in maturity. Because of that they forgo a lot of the upside so we would expect a more toned-down effect of these policies on credit relative to equity valuations,” he said.

Moving into 2017, Whiteley says the added risk of owning high yield bonds is too great for the potential reward, suggesting investors buy safer investment grade bonds that can still offer a decent yield.

Editor's Picks

Loading...

Videos from BNY Mellon Investment Management

Loading...

Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.