To all Consultiva Internacional Clients
POTENTIAL IMPACT OF THE ELECTION RESULTS IN THE UNITED STATES AND PUERTO RICO
This is the third event of the year with the potential to have a significant impact on markets in the short-term. However, as it happened in January after a fall in Chinese stock exchanges, and in June, after the decision of UK voters to leave the European Union ("Brexit"), we expect that markets will "normalize" relatively quickly. This means that they will return to the behavior we expected earlier in the year. As shown in the accompanying chart, US elections have historically led to declines in stock markets. Subsequent to this, there has been a rapid recovery and a behavior that is governed by local and global economic factors.
Observers of the U.S. economy have commented that a Trump victory could have a significant impact on foreign trade, private industry regulations and monetary policy. However, they recognize that in his public presentations he has left many "gray areas", and that his economic policy will not necessarily follow the Republican Party’s line. Trump’s selections for the transition team and cabinet members will serve as a proxy for policies the new administration will favor.
Regardless of how the transition to Trump's presidency takes place and the opportunities or risks that this represents, we are fiduciaries and long-term investors, not traders on the exchange floor. We recommend maintaining a long-term investment perspective and diversified portfolios, resting on the execution of best in class managers or funds to pursue returns and cope with volatility. Greater attention should be paid to the evolution of public policy and legislative action that may impact our investment strategies.
U.S. in the Short Term
In the short term, volatility is expected in the markets, with movements based on perception of change and speculation, and not so much on facts. However, this behavior should be of short duration as it is unlikely that the fundamentals of the U.S. economy of E.U.U. will change significantly in the next few months. A strengthening of the dollar could be observed, due to Trump's preference for a rise in interest rates established by the Federal Reserve, and by a protectionist vision that contrasts with the deflationary attitude of European and Japanese central banks. This could create pressure on the stock markets and cause margin calls. Capital could also be expected to flow into short-term fixed income investments and traditional safe havens such as gold, a flight to quality. The attitude against the establishment reflected in Trump’s victory could be tested again, as voters in Italy, France and Germany will weigh in on the European Union in upcoming elections.
Medium and Long-term trends in the U.S.
Although the Federal Reserve is a body with autonomy from the executive branch, the "governors" of the system are appointed by the president and at the moment there are two vacancies that Trump will fill. More importantly, Janet Yellen could leave before reaching the end of her term in 2018, and this would pave the way for greater influence from Trump in the U.S. economy. His expressions and postures during the presidential campaign show him favoring certain sectors, namely manufacturing, health care, biopharma and energy. Consumer goods could be at a disadvantage, given Trump’s protectionist stance in relation to foreign trade treaties and immigration, which could affect the availability of workers at minimum wage. Multinational companies in industrial, agriculture, financial services and others that have supply chains and global distribution could also suffer from implementing protectionist measures.
Ricardo Roselló’s victory in the polls does not mean that a change will occur in the relationship with the United States. The base for the next 4 to 6 years, under the supervision of a fiscal control board, is already being set. In any case, both the Republican Party and President Trump could be expected to favor economic austerity measures for Puerto Rico, with some strategic investment in infrastructure, as in all 50 states. Given Trump’s foreign policy stance, the island’s ability to continue to offer tax incentives to foreign companies and investors to stimulate local economic growth could be questioned. Therefore, native companies could be more vital than ever in the economic recovery of the island.
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