What would a Pence presidency mean for markets?

A Pence presidency could prove a “tremendous relief” to companies and countries dependent on international trade, while maintaining market-friendly policies of the current administration such as tax cuts and infrastructure spending, investors say.

President Donald Trump’s firing of FBI director James Comey is among the triggers that has prompted discussion of his possible impeachment as his campaign faces investigation for its links with Russia.

Pioneer Investments director of currency and portfolio manager for the US Paresh Upadhyaya predicts a 10 per cent chance of a Trump impeachment this year with that rising to 20 per cent in 2018.

If Trump were to resign or be removed from office, the succession process outlined in the US Constitution would elevate Vice President Mike Pence, a member of the Tea Party Caucus first elected to the House of Representatives in 2000, to the country’s highest office.

Upadhyaya points out that the investigation into Russia could take months if not years to come to a conclusion.

However, the appointment alone of a Department of Justice special counsel to investigate Trump, combined with his firing of Comey, just under two weeks ago prompted the S&P 500 to drop 1.8 per cent and yields on the 10-year Treasury to fall to 2.2 per cent.

The appeal of taking positions on US bonds is now limited unless the risk of a presidential impeachment increases, says Nuno Teixeira, head of institutional and retail solutions at Natixis Asset Management.

If impeachment concerns rise or doubts about Trump’s ability to push through his growth programme, Teixeira says they may take their underweight to US equities a “step further” by cutting back equity positions more broadly or even underweighting on these assets.

Brown Shipley chief investment officer Paul Broholm says that “almost any prediction risks becoming outdated before it can be published” due to the rate of breaking news surrounding the Trump presidency.

This morning it was revealed that Trump’s son-in-law and adviser Jared Kushner is under investigation for his links with Russia, while yesterday Trump threatened a punitive tax on German car imports to the US and failed to endorse Article 5 of Nato, the principle of collective defence.

Broholm says while Trump and his vice president appear aligned on taxes and infrastructure spending, Pence is a longtime supporter of free trade, unlike the “avowedly protectionist” president.

Consequently, a Pence presidency could prove a tremendous relief to companies and countries dependent on international trade.

“And while Trump has dialled back many of his threats to unilaterally rescind a range of important commercial treaties, the outlook for international growth would nevertheless likely improve under a far less nativist administration.”

Historical precedents

Bill Clinton is the only US president in recent history to be impeached, sending the S&P 500 down almost 20 per cent before recovering to new highs ahead of his acquittal, Broholm says.

When President Richard Nixon resigned in 1974 the initial market reaction was muted with the S&P 500 declining barely 1 per cent after his Oval Office address to the country. However, the index dropped 13.4 per cent in the following three weeks.

But Broholm says the US economy “looks nothing like” the economy of the early 1970s when the Opec oil embargo led to two years of stagflation.

“Undercut by recession and a crippled presidency unable to respond to economic headwinds, the US index ended 1974 down 42 per cent from its January 1973 peak, remaining in a slump for nearly the entire decade,” Broholm says.

Flows react to transatlantic shift in uncertainty

North American investors have turned to European stocks since the new administration came to power in January, according to ETF data from IHS Markit.

“European political uncertainty has gone in the opposite direction after the French election eased fears of a resurgence in populism across the continent,” says IHS Markit analyst Simon Colvin.

However, there is still room to recover from the $27bn withdrawn in 2016.

Investors are choosing unhedged strategies as the euro surges 7 per cent against the dollar since the start of the year, Colvin points out.

However, North American investors have so far chosen to steer clear of UK and Italy exposed funds, drawing a net $123m and $33m respectively.

When it comes to flows for US assets, Bank of America Merrill Lynch figures show US equities have seen outflows for eight of the last 10 weeks, high yield has seen outflows for eight of the last 12 weeks, US value stocks have seen outflows for nine of last 10 weeks, while US small cap stocks have seen outflows for eight of the last nine weeks.