US midterms: Trumponomics may trump politics

Regardless of the outcome, we expect the effects of his economic policies on the high yield market to last far beyond the midterm elections.

To name but a few of these measures, since taking office Trump has presided over: 

• Vast tax cuts, which are a boon to corporate America, and an increase to the deductibility of capital expenditure, which could also benefit high yield companies
• Restrictions on companies’ ability to deduct interest expense, to the detriment of highly leveraged companies
• The introduction of tariffs against trading partners, which could hurt consumers but on balance may actually benefit US high yield companies as they tend to be more domestically focused

There are three possible outcomes to the vote: Democrats gain control of one of the chambers of Congress (probably the House of Representatives, if polls are to be believed); Democrats gain control over both chambers; or Republicans retain both chambers.

But we do not anticipate any of these scenarios resulting in a significant economic impact. There is limited fiscal space under a Republican sweep (beyond perhaps making the tax cuts permanent). In the other scenarios, Trump would be able to strike down any legislation passed by Congress with his power of veto.

Presidential behaviour

The outcome could, however, spur changes in the behaviour of the president, who has shown himself to be particularly responsive to shifts in the political environment, to put it lightly.

Should the Republicans emerge from the vote weaker, Trump could try to advance more extreme policies in order to sustain his popularity, such as escalating the trade war with China. By the same token, though, Trump also could be hamstrung from pursuing further populist policies by a newly empowered Democratic party.

On the issue of trade, our economists do not anticipate a material impact overall on US growth from the tensions with China. The impact on investor and business sentiment will be more important, in our view.

Tight spreads

What does all this mean in terms of our market views? Within high yield, we are not factoring in any particular outcome, because the lasting impact of ‘Trumponomics’ means the die has already been cast.

Moreover, we invest in global high yield debt, rather than just the US market, important though it is. And we remain positive on the asset class globally because we are in a benign macroeconomic environment, where defaults are likely to stay low.

While we see less value in North American high yield debt than other markets, the rationale for this view is more about the overall state of the market than the US political cycle: spreads are among the tightest in the world. By contrast, we continue to favour Europe and emerging markets, where we believe the recent volatility is creating investment opportunities.