The spike in Treasury yields after Trump’s stunning upset in the U.S. presidential race says that investors believe his policies may lead to higher inflation and stronger growth. That’s generally positive for real assets, but there’s a lot we won’t know until we see what he actually does. Until then, we expect uncertainty to drive more volatility.
- With Republicans in control of the White House and Congress, we see increased chances of an infrastructure push, lower tax rates, tax reform and less regulation.
- These pro-growth policies, which should result in higher inflation, strengthen our confidence in an already positive backdrop for real assets.
- However, policy uncertainties may result in higher volatility until there is more clarity about what Trump will actually do.
Assessing Trump’s Pro-Growth Agenda
We see three main areas where there are likely to be meaningful economic policy differences in a Trump government compared with what we’ve experienced over the past eight years:
- Fiscal policy—Trump has promised a significant increase in fiscal spending, concentrated in rebuilding America’s infrastructure.
- Tax reform—Wide-ranging tax cuts are on the agenda, including lowering the corporate tax rate from 35% to 15%, incentives to repatriate foreign earnings and lower tax rates for high-income earners. Less regulation has also been a focus, which could lead to improved business confidence.
- Trade and immigration—Protectionist rhetoric suggests potential for lower levels of immigration and more trade restrictions.
At the moment, there is little clarity on which objectives Trump will carry forward, or how much Congressional Republicans will be aligned with his agenda, particularly on trade. In the longer term, we believe increased infrastructure spending, tax cuts, less regulation and a more pro-business attitude could be very positive for the economy.
The clean sweep by Republicans of the Presidency, Senate and House increases the chances of policy being enacted quickly. This suggests a shift to a pro-growth mindset for the government, in our view, driving increased inflation and pushing interest rates higher. This would be an inflection after the deflationary forces of globalization seen over the past 20 years.
The 10% rise in the 10-year Treasury yield in the day after Trump’s win indicates that markets are already bracing for an environment of higher inflation and higher growth. We believe this backdrop would likely impact markets in different ways:
- Negative for fixed income due to higher interest rates
- Positive for real assets, as long as higher inflation is accompanied by stronger growth
- For equities, it depends how strong inflationary trends are—a lurch toward protectionism could be quite negative for stocks (and also bonds), whereas a progrowth, pro-inflation environment would likely benefit cyclical assets
- Broadly, higher interest rates are generally positive for savers and financial institutions, which could offset some tightening of financial conditions
Below, Cohen & Steers investment teams offer their perspectives on the potential impact of Trump policies.
Real Estate Securities
U.S.: Our U.S. portfolios are positioned for modestly higher interest rates and growth. The Trump win confirms our view in this direction. However, our cyclical stance has moderated amid signs of slowing fundamentals in growth oriented sectors such as self storage, apartments, offices and hotels. More confidence in the growth outlook would likely lead us to pivot back into more-cyclical assets.
The correction in U.S. REITs since July has made valuations more attractive, in our view, with many REITs trading at discounts to the value of their property holdings. Considering the unusually high correlations to bond yields in recent months, REIT prices may still overshoot before finding a base and moving higher. If REITs continue to move down on concerns of rising yields, we see a potential buying opportunity emerging given the prospect for improving growth. Historically, REITs have performed well amid accelerating economic growth, even in the face of higher interest rates and higher inflation.
Canada: It is still unclear—despite talk of tearing up NAFTA (North American Free Trade Agreement)—whether renegotiations would target just Mexico, or also Canada. Supply chains for vehicles and oil (the largest trade sectors between the U.S. and Canada) are integrated across the border and have been so for decades, meaning that free trade with Canada will likely continue for most industries even if NAFTA goes away. At the same time, we believe stronger growth in the U.S., higher oil prices and increased support for cross-border energy trade could benefit Canada’s economy.
Europe: While volatility may increase in the short term, we expect the U.S. election to have little impact on Europe’s economy or property fundamentals. Increasing support for populist parties could lead to a more risk-averse market ahead of Italy’s constitutional referendum on December 4th and upcoming elections in France and Germany. Also, if U.S. inflation and growth drives U.S. interest rates higher, we would expect to see similar moves in European interest rates, which could be a modest negative.
Asia Pacific: Increased policy uncertainty could affect Asian economies—particularly related to trade policy towards China and other emerging markets. Any trade barriers would likely hurt both China and Japan, the two major economies in the region.
Global Listed Infrastructure
In the near term, infrastructure could perform well in an environment of rising political and economic uncertainty, which could be somewhat offset by increasing bond yields. Longer term, we believe an increased focus on fiscal spending in the U.S. should benefit the asset class. While Trump’s infrastructure plans reference more direct government spending on infrastructure, we believe this is a long-term positive for the private sector as well. Private sector capital will be essential as government balance sheets are stretched, which may lead to increased private sector ownership and operation of critical infrastructure assets.
The two subsectors with the most significant perceived leverage to the election outcome are renewable energy and midstream. Renewables have become less of a partisan issue in recent years. Renewable energy costs have declined to the degree that they are generally competitive with traditional fossil fuels, and renewable energy growth is increasingly benefiting traditionally Republican states.
In the midstream sector, Trump has been vocal in his support of fewer “restrictions” on oil and gas production, which we believe may benefit midstream companies over the long run. He has also stated support for the Keystone XL pipeline, which we interpret as his taking a constructive stance toward pipeline development more broadly.
Over the next 12–24 months, we believe valuations will continue to be supported by macro tailwinds, including broadly accommodative monetary policies and increased fiscal stimulus, along with heightened investor demand for alternatives to traditional equities and bonds. We expect some emerging-market infrastructure companies to face increased uncertainty, particularly in regions and businesses that are engaged in significant trade with the U.S.
MLPs and Midstream Energy
The major master limited partnership (MLP) and energy infrastructure indexes rose strongly on the election news, indicating a general view that a Trump government is likely to be broadly positive for MLPs and the energy industry overall. Trump appears less likely to implement restrictions in developing U.S. oil and gas resources. We also see a more favorable stance toward new pipeline development. For instance, the Dakota Access Pipeline may now proceed and the Keystone XL Pipeline (blocked by Obama) could be revived.
One potential risk is that with the GOP in control of the White House and Congress, broad tax reforms could adversely impact the tax benefit of MLPs, although initial indications are that partnerships are likely to maintain their pass-through structure.
We see no immediate material impact from the election on commodity supply and demand. In the near term, we expect a period of elevated volatility and the potential for risk aversion due to general uncertainty. We believe conditions over the intermediate to longer term should be generally supportive for commodities due to expected fiscal stimulus and stronger growth.
Possible negative developments include the potential for increased trade barriers with China and the possibility that the new administration may label China a currency manipulator. These factors would create a level of uncertainty for an economy that is a major consumer of commodities.
In terms of the longer-term impact to specific commodities, we believe the devil is in the details and will depend on the actual policy/legislation that is implemented. This could include measures related to energy independence, infrastructure spending and the renegotiation of trade agreements. In the near term, we anticipate weakness in emerging-market currencies could impact global commodity trade.
Natural Resource Equities
Inflationary environments are generally positive for natural resource equities. However, if hard lines are drawn against U.S. trading partners, it could be negative over the medium term, especially if protectionist policies impact growth in emerging markets that are slowly recovering. We expect some heightened market volatility over the next several months as investors strive for clarity on new policies and legislation.
Important Disclosures. Data quoted represents past performance, which is no guarantee of future results. The views and opinions in the preceding commentary are as of the date of publication and are subject to change without notice. There is no guarantee that any market forecast made in this commentary will be realized. This material represents our assessment of the market environment at a specific point in time, should not be relied upon as investment advice, does not constitute a recommendation to buy or sell a security, commodity interest or other investment and is not intended to predict or depict performance of any investment.
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Risks of Investing in Real Assets. A real assets strategy is subject to the risk that its asset allocations may not achieve the desired risk-return characteristic, underperform other similar investment strategies or cause an investor to lose money. The risks of investing in REITs are similar to those associated with direct investments in real estate securities. Property values may fall due to increasing vacancies, declining rents resulting from economic, legal, tax, political or technological developments, lack of liquidity, limited diversification and sensitivity to certain economic factors such as interest-rate changes and market recessions. An investment in commodity-linked derivative instruments may be subject to greater volatility than investments in traditional securities, particularly if the instruments involve leverage. Infrastructure issuers may be subject to adverse economic occurrences, government regulation, operational or other mishaps, tariffs and changes in tax laws and accounting standards. Foreign securities involve special risks, including currency fluctuation and lower liquidity. The market value of securities of natural resource companies may be affected by numerous factors, including events occurring in nature, inflationary pressures and international politics. Because the strategy invests significantly in natural resource companies, there is the risk that the strategy will perform poorly during a downturn in the natural resource sector.
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