• Election Impact United States – A Trump Presidency, what’s next? ( JLL’s latest report )

    17 November 2016

    Donald Trump defeated Hillary Clinton and will become the 45th President of the United States on January 20, 2017. He will be the first President to take office who has never held any other public office or public role, so there is no precedent as to how exactly he will govern as compared to how he campaigned. The advisors and appointments of his new administration will be critically important.

    The Republicans also fared well in down-ticket elections, keeping control of the House of Representatives and the Senate. Typically, alignment in the Executive and Legislative branches of government speeds the passage of legislation. However, the potential for results remains uncertain now because bipartisanship is more asymmetrical than in the past due to the complexion of the Republican party, and the Democrats still have the ability to delay or block progress (since the Republicans do not have the 60 Senate seats needed to prevent filibuster).

    With polls pointing to a 70+ percent chance of Clinton winning leading up to the voting yesterday, the Trump victory proved once again that polls can be very misleading. The surprise Trump victory was the result of an electorate that sought change. There has been an underlying and growing appetite for change from middle and lower income Americans who have been hurt by the last recession and left behind by the recent recovery. As a result, Trump won several Rust Belt states and smaller towns and rural areas in middle-America that had been expected to be Democratic. The “Obama coalition” did not end up translating the way Democrats had hoped.



    The markets, despite having priced in a Clinton Presidency, have reacted in a fairly muted fashion, with most major indexes flat or up after initial sell offs and the market reaction has been significantly more positive than the day after the 2008 and 2012 elections. Compared with the post-Brexit reactions of 4-10 percent equity markets declines around the world, U.S. markets have been surprisingly resilient. Treasury yields moved upward as expectations for a rate hike increased. U.S. 10-year yields are
    currently at their highest point in eight months (around 2.0 percent). The yield curve is steepening.

    It is worth noting that President-elect Trump was conciliatory in his acceptance speech toward Clinton, and also that his message was more statesman like, gracious and measured than the volatile and often insulting campaign rhetoric. In his acceptance speech Trump said: “We will seek common ground, not hostility.” Ultimately the markets will wait to see what type of President Trump is, but the initial tone has helped to limit expected damage in the financial markets.



    Given the relatively surprising election outcome, there are some uncertainties regarding broad policy initiatives and the manner in which the Trump administration will govern. The Republican sweep opens up a range of opportunities, but the reality is that Trump is not a typical Republican, and angst and disagreement remain within the Republican Party. The net result could be some economic benefit from fiscal stimulus and less regulation, but risks around foreign policy and trade.

    SPENDING – Infrastructure spending is one area with fairly broad bipartisan support. To get through the legislature, this would likely have to be offset by repatriation and taxation of overseas profits. Spending on national defense and the repeal of sequestration related to defense and public safety is likely, but continued cuts to non-defense programs may offset this spending. Thus far, aerospace/defense is one of the highest performing sectors of this post-election day, with the sector’s index gaining over 4 percent.

    TAXES-Trump campaigned on the promise of tax cuts that include simplifying personal tax rates to fewer levels, lowering corporate tax rates to 15 percent and a tax holiday for the repatriation of overseas profits. The question again will be what exactly can Trump implement, and how will he propose to pay for it. The expectation of higher GDP growth may not be enough to convince more fiscally moderate legislators.

    REGULATION–The regulatory environment could be loosened across the board to financial-focused agencies and non-financial-focused agencies such as the Environmental Protection Agency (EPA).While this may temper the legal services sector, it will likely benefit diversified manufacturers.

    TRADE AND GLOBAL IMPLICATIONS -Trade is one place where the President has some unilateral power that creates some uncertainty. Despite harsh campaign rhetoric, it is unlikely that many existing trade deals like Trans-Pacific Partnership (TPP) or North American Free Trade Agreement (NAFTA) would actually get repealed. There will certainly be further discussions and likely additional rhetoric on suspected currency or trade manipulators and the potential for tariffs. China and Mexico will be on the watch list, but much is yet unknown about how trade will actually be treated by this administration and how policies will be perceived and reacted to by our trading partners.

    IMPACT ON THE REST OF THE WORLD -Another global implication is additional uncertainty about mainstream candidates across Europe who may be more nervous than before given this result. If populism and protectionism take further hold, that would impact trade and put additional pressure on prices and inflation.

    MONETARY POLICY –The initial expectation was that a Trump victory would create more volatility and take the expected rate hike by the Fed in December off the table. However, if the markets remain stable, the Fed will instead focus on the underlying fundamentals of the economy (e.g. market at or near full employment, wage growth, stable pricing). There is some question about whether Federal Reserve Chair Janet Yellen will resign or be replaced given the new regime. Trump’s fiscal plan seems to point to a rise in the deficit, which could lead to higher inflation and interest rates expectations.



    Until the policy particulars start to take form, the ultimate impact on real estate will be uncertain. Financial markets, which tend to react more quickly, have taken this shock mostly in stride, which should create some stability in terms of real estate activity. With financial industry regulation likely to either loosen or at minimum, no longer tighten, capital flows may improve and create a short-to-medium term net positive for investment activity and performance. However, lower regulation could lead to more risk or volatility in the longer term. While cap rates are low, spreads remain historically healthy and the fundamentals are sound broadly across real estate sectors. Fiscal and trade policies that could lead to higher inflation and interest rates could impact pricing if not offset by faster growth, but we do not expect much change initially. Overall on the demand side, U.S. companies are likely to adopt a wait-and-see approach to decision-making as the presidential transition efforts get underway and cabinet positions begin to solidify. The potential of lower regulation, increased defense spending and tax cuts would on their own be pro-growth positive for real estate demand, but the timing, mix, and other offsetting policies or compromises are still unknown. Until the policy details are defined and implemented, we expect political headlines and potentially financial markets to be volatile, but underlying real estate markets to remain relatively steady.



    DEFENSE-Upside potential for defense contractors. Most prime contractors’ stocks are up over 4 percent.

    LEGAL-A Clinton/Elizabeth Warren cabinet would have ushered in an unprecedented period of new regulations, whereas the Republican alignment will seek to overturn Dodd-Frank and reduce regulations.

    FINANCE-Finance overall could receive a boost from the prospect of deregulation. Reduced compliance costs should benefit retail banks and investment banks alike. Private equity could be negatively impacted by revisions to the tax code. Hedge funds and private real estate investors may also see negative impact as Trump has made a repeal of the carried interest provision a centerpiece of his campaign.

    UTILITIES–Likely a loss for utilities, given the sector’s high sensitivity to rising interest rates.

    ENERGY-Win for the oil and gas sector due to loosened drilling and environmental protection regulations, though the supply and demand fundamentals still will govern production. On the other hand, government-subsidized alternative energy programs –e.g. solar –are likely to face future funding shortfalls.

    MANUFACTURING-Win for American manufacturing. Protectionism will limit the outsourcing of jobs but technological improvements will continue to displace unskilled workers. Large infrastructure investments are likely.

    TECHNOLOGY-Mixed impact for the technology sector. Big tech employers were banking on Hillary’s support for H1B; Trump’s anti-immigration stance is likely to increase domestic wages for American tech workers. On the flip side, the tax holiday for repatriation of overseas profits would be particularly beneficial (though one time) for technology companies.

    HEALTH CARE –The potential full or partial repeal of the Affordable Care Act will create uncertainty for health care providers and insurers. Pharmaceutical and biotech companies in contrast could fare better due to less regulation and the potential for repatriation of overseas profits.

    FEDERAL GOVERNMENT -Expect the Reduce the Footprint initiative within GSA to gain velocity and for federal payrolls to decline (per the campaign’s “drain the swamp” rhetoric).



    Info by JLL



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