Trump’s surprise presidential victory sent initial shockwaves to global equity markets. How will markets digest the new political reality going forward? Bruce Cooper, Chief Executive Officer and Chief Investment Officer, TD Asset Management gives his perspective. Click here for TDAM’s full report.
00:00:08.734 I'm here with Bruce Cooper, Chief Investment Officer at TD Asset Management.
00:00:11.900 We're here to talk about the shocking, stunning,
00:00:15.120 at the very least unexpected results that came out from the United States last night.
00:00:19.900 Bruce, I think a lot of people woke up this morning who
00:00:23.910 didn't see the results last night completely shocked by what had happened.
00:00:28.010 Social and political ideas aside, we saw a huge sell-off overseas
00:00:32.989 when the results first came in.
00:00:34.280 But it seems to have moderated a bit.
00:00:37.080 Markets hadn't priced this in.
00:00:38.650 No, definitely.
00:00:39.460 This was not the base case scenario.
00:00:40.960 I think most people anticipated that Hillary Clinton would win the presidency-- that's
00:00:45.170 what the polls seemed to suggest-- and then that the Republicans would retain control
00:00:49.250 of the House of Representatives and that that kind of divided government
00:00:52.764 would give us something like the status quo because that's
00:00:55.180 what we have now, a Democratic president and Republicans controlling Congress.
00:00:58.950 So this is a surprising outcome.
00:01:01.810 And the market does need to wrap its mind around that.
00:01:04.370 What does this mean for investors?
00:01:06.224 I mean, I know that's a loaded question.
00:01:07.890 I think you could maybe say in the near term, medium, and long term.
00:01:11.500 But what do you think?
00:01:13.196 What do we need to start paying attention to?
00:01:15.070 Well, there are for sure things on either side of the ledger.
00:01:17.870 And I think the initial reaction will be for markets to be down a little bit.
00:01:21.150 That's what you referred to.
00:01:22.180 They were down overnight.
00:01:23.221 And I think they will be down a little bit.
00:01:25.070 I think the things that concern investors are trade, first of all.
00:01:29.950 Clearly, Donald Trump has been very vocal in his opposition
00:01:33.740 to the North American Free Trade Agreement, to TPP,
00:01:38.490 and I would say, generally, to trade deals that we have out there.
00:01:42.810 And companies have been big beneficiaries of free trade over a long period of time.
00:01:46.850 And so I think markets will be a little worried on the trade front.
00:01:50.510 Clearly, he's been vocal about the Federal Reserve
00:01:54.900 and in particular about Janet Yellen.
00:01:56.510 Certainly, some uncertainty is introduced on the subject of monetary policy.
00:02:01.700 And he is a pretty unpredictable character.
00:02:04.090 And I think markets don't like unpredictability.
00:02:07.700 And so we don't know how he's going to react in many situations.
00:02:10.639 So I think those are the things to be concerned about on one side of the ledger.
00:02:14.210 I think when we heard the campaigning, I mean,
00:02:17.670 people felt-- at least, the commentary was that perhaps his policy wasn't
00:02:21.800 as well-formed, perhaps, as others.
00:02:23.447 But there's a few things he mentioned.
00:02:25.030 Trade, obviously, was very clear.
00:02:27.220 You talked about the Fed, which I'll come back to.
00:02:29.500 Tax reform, he did talk about personal and corporate tax reform, or alluded to it.
00:02:34.295 Really, there are some things on the other side of the ledger from a market perspective
00:02:37.920 that I think people will focus on.
00:02:39.336 Tax reform is one.
00:02:40.740 He's talked about lowering tax rates, both personal and corporate.
00:02:44.440 On the corporate side, I think that would be considered benefit
00:02:47.630 from an earnings perspective.
00:02:48.920 And so we could see that.
00:02:51.010 Also, he's talked about allowing companies to repatriate earnings they have offshore.
00:02:56.650 A lot of companies have big cash piles offshore.
00:02:59.097 They'd like to bring it back to the United States.
00:03:01.180 But if they do so, they'll be subject to very high tax rate.
00:03:04.300 He might lower that tax rate, which would be beneficial to companies.
00:03:08.350 And so for sure, on the tax side, I think there
00:03:10.760 is some cause for optimism from a market perspective.
00:03:14.450 The other one, I think, is his fiscal policy.
00:03:18.440 He's been quite vocal about his belief that we
00:03:21.390 can have an aggressive fiscal program here.
00:03:23.930 I think we're talking about how I think Hillary Clinton promised-- I think
00:03:27.630 it was, $275 million in fiscal spending.
00:03:30.700 Billion, excuse me.
00:03:31.640 Yeah, makes a big difference in the economy.
00:03:33.860 So $275 billion.
00:03:35.170 He promised to double that.
00:03:36.960 Yeah, he's talked about the fact that America's infrastructure is broken
00:03:40.510 and that we need to very aggressively invest in that infrastructure.
00:03:44.170 I think that will be considered as a positive from a market perspective.
00:03:48.720 And that's an area where there's actually some broad agreement,
00:03:51.350 I would say, between parties.
00:03:52.570 And so we could actually see something get done here.
00:03:55.485 And we're seeing that around the world.
00:03:57.110 Here in Canada, of course, we're seeing spending on infrastructure as well.
00:04:00.235 And so that would be a tailwind of growth.
00:04:03.460 And I think the market would like to see that.
00:04:05.530 What about energy companies?
00:04:07.840 We got the sense as well that he would be more friendly towards, I think,
00:04:12.450 the traditional energy complex.
00:04:14.297 Is that something you could see happening as well?
00:04:16.380 Yeah, it could have an impact on companies' ability to drill in certain areas.
00:04:22.910 It could have implications for tax policy.
00:04:25.560 Of course, the biggest issue for energy companies
00:04:28.540 is the price of oil, which will be driven by broad economic growth.
00:04:32.590 But the perception for sure will be that he'll
00:04:34.840 be more supportive of, say, the traditional energy industry, oil and gas,
00:04:39.930 and less supportive of alternative energy.
00:04:42.970 And I think we could see a sell-off in alternative energy
00:04:47.390 and maybe some support for traditional oil and gas here medium term.
00:04:52.190 I think a lot of people were listening to how he campaigned
00:04:55.137 and wondering at this point a couple things.
00:04:56.970 Will his policies that he actually puts in place
00:04:59.100 be more nuanced than what he was campaigning on?
00:05:01.450 And secondly, will he have the support of Congress,
00:05:04.940 even though it is a Republican Congress?
00:05:07.530 Yeah, first of all, on the first question, I think that's very tough to tell.
00:05:11.314 I mean, he's never been a politician.
00:05:15.497 He has not thought deeply, I don't think, about policy issues.
00:05:18.080 And so we'll have to see how that unfolds.
00:05:20.730 I think the issue relating to how he will relate to his own party--
00:05:26.592 if we can call it that.
00:05:27.550 I mean, actually, Donald Trump is not really a traditional Republican.
00:05:30.466 So I think that's going to be a fascinating one.
00:05:33.220 He's a bit of a maverick.
00:05:35.724 So I think he'll be able to get certain things done.
00:05:37.890 We talked about infrastructure, maybe some stuff on the tax side.
00:05:42.820 But it's also possible there will be areas of friction within the party.
00:05:49.230 And to some extent, we might look to Congress to be a restraint on Trump
00:05:54.997 because, of course, the president can't do whatever they want.
00:05:57.580 Bills need do originate in the House or in Congress.
00:06:02.430 And so that could be a source of constraint for the president in this situation.
00:06:08.440 You have been talking to me for a long time-- gosh,
00:06:12.330 for years now-- about the importance of income inequality
00:06:15.610 and the lack of social mobility and those trends happening around the world.
00:06:18.804 We're seeing that happening in lots of places.
00:06:20.720 And it's really coming forth in the United States.
00:06:22.804 At least, that's the message, I think, people are getting.
00:06:25.220 What does that mean for economic growth and for the investor?
00:06:27.920 Well, I think you're right to point to this as a root cause.
00:06:30.877 We saw this with Brexit as well.
00:06:32.210 I think one message to take from this is that the country is very, very divided.
00:06:35.830 Trump won a pretty big victory.
00:06:37.690 But of course, there are tens of millions of people on the other side.
00:06:41.260 And a lot of people who supported Trump in these Rust Belt states
00:06:44.790 like Wisconsin and Michigan and Pennsylvania are
00:06:47.790 people that are just looking for change because they're not
00:06:50.550 doing very well right now.
00:06:53.180 And so we'll have to see whether it's the United Kingdom with Brexit
00:06:57.470 or the United States, how it resolves this issue of income inequality.
00:07:02.820 But broadly speaking, we think of income inequality
00:07:05.860 as being a negative for economic growth because the extent-- you've
00:07:08.870 got the lower part of the income spectrum with not a lot to spend.
00:07:14.760 That means the consumption is under pressure.
00:07:17.075 And that's what we've seen.
00:07:18.200 The consumer is not very robust in the United States.
00:07:21.174 And that's a trend we'll have to watch very, very closely.
00:07:23.590 He mentioned when he was campaigning that he was not supportive of Janet Yellen.
00:07:28.200 He wanted to replace the Fed chair.
00:07:29.730 So there's that.
00:07:31.244 And also, what do you expect to be happening in December from the Fed?
00:07:34.160 So the market going into this election had priced in something
00:07:37.910 like an 80% probability of a rate hike at the next meeting, 25 basis points.
00:07:43.560 And I think it'll be interesting to see the market volatility that
00:07:46.310 unfolds in the next little while.
00:07:47.684 The Fed has showed that it is mindful of volatility.
00:07:52.890 And if we get a big market reaction, they could step to the sidelines.
00:07:57.560 I expect their base case is they would still like to hike by 25 basis points.
00:08:01.910 Look, the economy is OK.
00:08:03.290 It's not going great guns.
00:08:04.940 But jobs growth has been pretty decent.
00:08:07.350 Wage growth is actually the highest in this cycle.
00:08:12.740 So I can imagine they will hike 25 basis points
00:08:16.110 and then sit on the sidelines for a pretty long period of time.
00:08:19.550 To be honest, that was our base case expectation anyway,
00:08:22.210 that we might get one hike in December and then
00:08:24.980 a long period of sitting on the sidelines.
00:08:26.744 And who's going to be overseeing that process?
00:08:28.660 Will it be Janet Yellen?
00:08:29.980 I anticipate it will be Janet Yellen.
00:08:31.890 Of course, Donald Trump has been critical of her.
00:08:35.429 But I think it would be difficult to replace her.
00:08:38.570 And we do anticipate that she'll be in chair probably until the end of her term.
00:08:43.710 Final question for you.
00:08:45.950 What does this mean for the Canadian markets or the loonie?
00:08:50.620 What we saw, initially, quite a move in the Canadian dollar down.
00:08:56.700 Yeah, traditionally, the US dollar is a safe haven currency.
00:09:01.250 And so when you get uncertainty in markets, the US dollar is up
00:09:03.877 and the Canadian dollar is down.
00:09:05.210 I think that's what we're seeing this morning.
00:09:07.126 I think that's a reasonable expectation.
00:09:09.430 We've been cautious on the Canadian dollar in any case,
00:09:12.080 really, because we think the Canadian economy is pretty subdued.
00:09:17.410 And obviously, the price of oil has come up a little bit.
00:09:19.950 But it's not at a level where we're going to get a lot of investment
00:09:23.180 in the Canadian economy.
00:09:24.220 So we think the Canadian dollar is yet another one
00:09:27.450 of these lower-for-longer securities.
00:09:32.120 And from a short-term perspective, to the extent
00:09:34.720 there's market volatility, which I think will see short term,
00:09:37.972 I think the US dollar probably a bit stronger and the Canadian dollar a bit weaker.
00:09:41.430 Just a final thought, pulling right up here.
00:09:44.450 What do investors need to keep in mind as this unfolds?
00:09:46.785 Because it's going to be bumpy, I expect, over the next little while.
00:09:49.660 Yeah, I think this is the kind of time we need
00:09:51.860 to remind ourselves, focus on the long term because there is a temptation to react,
00:09:57.960 which is normally the wrong thing to do.
00:10:01.790 So market timing we know is incredibly difficult. If you sell today,
00:10:06.730 you're faced with the very difficult problem of when do I get back in.
00:10:10.670 So we're trying to build a very diversified portfolios with very high quality assets,
00:10:16.410 investing in companies that will be around tomorrow, the next day, five years from now,
00:10:21.120 10 years from now.
00:10:22.530 They will get through this challenge.
00:10:25.150 And the portfolios are built to withstand this kind of volatility.
00:10:28.240 And so I would encourage folks to be mindful of what's going on in the world,
00:10:33.770 but not to react to what's going on in the world.
00:10:36.810 Understand your objectives from a long-term basis, and build portfolios around that.
00:10:41.620 Bruce, thank you very much.
00:10:42.760 Great to be here.
00:10:43.500 Bruce Cooper, Chief Investment Officer at TD Asset Management.
00:10:46.083 I'm Kim Parlee.
00:10:46.940 Thank you for watching.