US treasuries would be a “bizarre” safe haven if Donald Trump wins next week’s US presidential election, according to Investec head of fund research Andrew Summers.
Trump has gained in the polls following revelations the FBI will be investigating emails connected to a top Hillary Clinton aide.
Summers says: “People say if Trump wins, the equity market will fall, and everyone will pile into Treasuries, which would be very bizarre when Donald Trump’s fiscal plans are to absolutely balloon the budget deficit and to renegotiate the very bonds people will almost certainly pile into the day he gets elected.”
Such a scenario would have parallels with Brexit, where investors “piled into UK gilts”, Summers says.
“So they basically piled on to a balance sheet, which most commentators think is less attractive now because the UK government now is almost certainly going to raise less revenue than it would have done if we’d stayed in the EU.”
Summers anticipates that in the case of a Trump win, he would “sit a little bit on the sidelines and let it play out”.
“A lot of it will come in the next couple of days [after an election win]: what kind of statements does he make, who does he appoint to his transition team, who does he have as his economic advisers.
“If he becomes a traditional pro-business Republican I think markets will be delighted, because he’ll cut taxes on the rich and corporations. But his entire pitch is to be absolutely not that. It would be the biggest U-turn ever if he became a pro-business Republican.”
Summers says there may be opportunities to play on the reflation theme given Trump will try to push up economic growth through cutting taxes and spending massively on infrastructure, but he warns this could be extremely risky.
“What we’d be asking ourselves is how sustainable that is. If he is engineering a short-term boom, it may not be worth even trying to play that. You don’t want to be left holding the balloon when it pops.”
“I can’t see us trying to be clever and trying to make money or more likely lose money for clients by predicting which is almost by definition unpredictable – Donald Trump is unpredictable.”
Despite the letter from the FBI over the weekend, Clinton is still ahead in the polls with FiveThirtyEight predicting she has a 78.8 per cent chance of success.
Summers says: “Our view is that if we can get through this period of political uncertainty, let’s assume Clinton wins, let’s assume the Fed ups rates, the market takes it in its stride, there’s no big issues in Europe next year, we would expect to see a firming up of economic growth and further progress made in the equity markets. We’ve got to get through a few hurdles before we’re in that position.”