What will be the Impact of a Trump Presidency on Global High Yield?

Mark Remington, Global High Yield Bond Fund Manager

George Flynn, Global High Yield Bond Fund Manager

Donald Trump and the Republican Party completed a red sweep in the US elections, winning the Presidency, Senate and House. Although there are still a lot of unknows at this moment of time as to the exact policy of the administration, several trends are likely to emerge.

1. Tariffs on Autos – President Trump is expected to impose tariffs on vehicles imported from Mexico, Asia, and Europe. Some reports suggest tariffs as high as 200% on auto imports from Mexico. With around 5% of the global high yield market being OEMs (original equipment manufacturer) and auto suppliers, this could create a great deal of uncertainty, with non-US names that are highly leveraged the most likely losers, and US OEMs, whose cars will become more price competitive the likely winners.

2. Inflationary pressures - With Trump having control of the House and Senate, he may push for renewed tax cuts to stimulate economic growth. Assuming no spending cuts, this will increase the budget deficit even further (currently at 6.3% of GDP). All else being equal this fiscal stimulus will be inflationary, which in turn would likely mean interest rates stay elevated in the medium to long term. Higher interest rates are not helpful for those corporates who are relying on rates to come down for the sustainability of their capital structure. Notably, real estate companies that levered up in the 2010’s and highly levered LBOs (leverage buyouts).

3. Increased Food Regulation – Robert Kennedy (RFK) has been put in charge of reforming the FDA (US Food and Drug Administration), with Trump stating that RFK is “going to make America healthy again.” This likely means a lot of upheaval in the FDA and potential new regulations on food companies. This could be negative for US food companies that manufacture ultra processed foods, such as sugary cereals, soft drinks and fast food.

4. A Push for Peace in Ukraine – Much talk is that the President Elect will push for peace between Russian and the Ukraine. This may mean land concessions to Russia and a political backlash, but for the wider markets and it will likely be a positive. Markets dislike uncertainty, so the removal of a war will likely help wider market sentiment. The actual economic impact, assuming the Russian markets open-up again, will likely be a negative for hard commodities as supply increases, but a positive for European economies as they will be able to access cheaper gas to power their grids.

5. Increased US Oil and Gas Production – Trump has been vocal on more drilling in the US with the goal of reducing energy bills. He is planning to make regulations less onerous on drilling. It’s a mixed bag, as less regulation provide greater opportunities for growth, but at the same time increased production will put downward pressure on prices. A move down in prices may hit US shale profitability and credit strength. Especially as US shale has a competitive disadvantage on the global stage, as the average break-even price of US shale is in the USD $46 to $58 range, compared to conventional oil fields have a break-even price in the USD $31 area.

Sources: Bloomberg, Reuters, Federal reserve bank of Dallas, Rystad Energy

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