US midterms: Damp squib or another ‘sugar rush’ for US economy?

As Americans headed to the polls on Tuesday, analysts were predicting US President Donald Trump would face the prospect of a divided Congress with the Democrats seizing the House of Representatives.

The latter delivered on this expectation, going beyond the 218 votes needed to gain the House, however, the Republicans gained the 50 seats required to retain majority in the Senate.

David Roberts, co-manager of the Liontrust Strategic Bond fund, said the results were a “damp squib”.

“US midterms: surprisingly unsurprising,” he said. “After a run of elections where polls and forecasts proved wrong, we finally have one go to plan, so it’s no surprise that market reaction is muted.”

However, the stockmarket’s reaction was still positive; the SP 500 is up 1.3% to 2,792 points as the market opened on Wednesday, while the Nasdaq and Dow Jones are also up 1.7% and 1%, respectively.

Infrastructure spend

Many market commentators see the potential for the result to provide another boost to the US economy by helping push through infrastructure projects.

Paras Anand, head of asset management, APAC, at Fidelity International, said the result would lead to an increase in infrastructure spend.

What do the US midterms mean for infrastructure?

During the 2016 election campaign, Anand noted an infrastructure package was high on the Democrat’s policy agenda, while Trump has been looking to pass stimulus measures for the past two years.

“Any development in this direction would further spur the overall economy, continue to push wages in an already tight labour market, and potentially challenge the current expectations around the Federal Reserve’s activity for next year,” he said.

“Most political events have an underwhelming economic impact – could the US midterms prove the exception?”

Echoing this view, Jim Lydotes, portfolio manager at The Boston Company, said the Republicans retention of the Senate would lead to a larger infrastructure programme.

He said the removal of many regulatory hurdles by Trump’s administration over the past two years has now paved the way for an infrastructure package.

“The previous administration implemented a number of environmental policies that slowed down energy and utility infrastructure building,” he said.

“Over the past two years, we have seen a loosening of some of these policies. This can be seen as positive for business and energy infrastructure development.”

Ben Yearsley, director at Shore Financial Planning, said the need to restore much of the crumbling infrastructure in the US was equally crucial in a Democratic state as a Republican one.

He said any infrastructure increase would be an economic boost to the US, but added it is debatable whether another “sugar rush” is necessary for the US economy at this stage in the cycle.

“The big danger is that a huge new package will hasten the pace of Fed rate rises, thus dampening activity and causing further knock on problems for bond investors and emerging markets,” he said.

Yearsley recommended investors be exposed to the US either passively through an SP 500 tracker or by buying the Merian North American Equity fund.

Gallery: The impact of the US midterm elections on five sectors

Divided country

However, James Athey, senior investment manager at Aberdeen Standard Investments, said the US midterm results acted as just another reminder of how divided American politics is.

He said investors were a “long way off” understanding what the economic cost of this division would be, but believes it will be felt eventually.

“Trump now finds himself in a counter-intuitive position. The one thing he cares about most is his core voter base but the election result leaves him having to focus his energy abroad to keep those at home happy. That means he needs to strike a balance,” he says.

As the trade war with China is hurting the companies many of his voters may be working for, Trump may have to strike a deal with China.

“Regardless of whether Trump does strike a deal with China, this is no turning point in his presidency,” Athey continued. “There has been some talk that the result could restrain him and this seems dangerously naïve to me.”

Weaker dollar

Meanwhile, Richard Larner, head of research at Brooks Macdonald, believes the news can finally hold back the dollar’s rise.

“It supports our house view that the tailwinds acting to strength the dollar are lessening, as we expect greater oversight of Trump’s administration to reduce the support the currency has seen from protectionist trade policy and pro-growth fiscal reforms (albeit we recognise the potential positive effects that would be associated with any infrastructure investment programme),” he said.

This would provide much-needed support for assets which benefit from a weaker dollar, such as emerging markets equities.

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