President Obama proclaimed in the midst of vote counting yesterday that ‘whatever happens, the sun will rise in the morning’.
And he was right.
America has woken up to the reality of a Trump Presidency.
There has been much speculation of late about what a Trump Presidency would bring not only to the Oval Office, but to world relations – and of course investment markets.
Investors do not like uncertainty. They really don’t. As we saw with Brexit, markets were volatile – but started to settle down after a short period of time.
What is different here? Well, a number of things. First is that we have a solid 2 months until Trump’s Inauguration. Plenty of time for speculation, and market jitters.
Then there is the question of what type of President will Trump be? Will he be the combative Trump we saw throughout the campaign, or will it be the conciliatory Trump that was on show during his victory speech?
Lastly there is Trump’s team. Who he assembles in cabinet will give us an insight into he approach, and how he deals with fractured relationships within the Republican party (remembering that many Republicans distanced themselves from Trump during the campaign).
While Trump’s victory will come as a bit of a shock to many, there is a good chance that economic realities and the checks and balances provided by Congress will see his policies become more pragmatic.
Finally, while the Presidential election is an important political event, investors should remain focused on adhering to their financial objectives, ensuring that their portfolios are well diversified across asset classes and geographies, and continuing to take a long-term view.
One thing for sure is that investors (and investment markets) are more resilient. One only needs to reflect on the major issues that the world has dealt with over the last 15 years to think that perhaps these types of events are slowly becoming the norm, and in many ways we have had plenty of practice getting used to them.
We have compiled the following commentary courtesy of Dr Shane Oliver (Head of Investment Strategy and Economics and Chief Economist at AMP Capital).
As always, should you have any questions please contact us.
Trump’s key policies
Taxation: Trump promises significant personal tax cuts including a cut in the top marginal tax rate to 33% from 39%, a cut in the corporate tax rate to 15% from as high as 39% and the removal of estate tax.
Infrastructure: Trump wants to increase infrastructure spending.
Government spending: Trump wants to reduce non-defence discretionary spending by 1% a year (the “penny plan”), but increase spending on defence and veterans.
Budget deficit: Trump’s policies are likely to lead to a higher budget deficit and public debt.
Trade: Trump wants to renegotiate free trade agreements and has proposed various protectionist policies, eg; a 45% tariff on Chinese goods, 35% on Mexican goods.
Regulation: Trump generally wants to reduce industry regulation, which would be good for financials and energy.
Immigration: Trump wants to build a wall with Mexico, deport 11 million illegal immigrants, put a ban on Muslims entering the US and require firms to hire Americans first.
Healthcare: Trump wants to repeal Obamacare and allow the importation of foreign drugs.
Foreign policy: Trump wants to reposition alliances to put “America first” and get allies to pay more, would confront China over the South China Sea and would bomb oil fields under IS control.
Risks and uncertainties
A problem for Donald Trump and America is that he will start his Presidency as extremely unpopular – in fact he is the least popular candidate on record and the election campaign has also highlighted a deeply divided America.
Source: Gallup, BCA Research, AMP Capital
He also faces a difficult time negotiating with his Republican colleagues in Congress given many distanced themselves from him during the election campaign.
Trump’s victory, like the Brexit vote, adds momentum to a backlash against establishment economic policies and specifically a move away from economic rationalist policies in favour of populism and a reversal of globalisation which could be a negative for long term global economic growth. The shift away from globalisation could also add to geopolitical instability (Russian President Putin was a supporter of Brexit and Trump!). More positively though, a greater focus on using fiscal stimulus could help reduce the burden on monetary policy and policies to reduce inequality could help support longer term economic growth.
Some of Trump’s economic policies could provide a boost to the US economy. The Reaganesque combination of big tax cuts and increased defence and infrastructure spending will provide an initial fiscal stimulus and, with reduced regulation, a bit of a supply side boost to the economy. The downside though is that this will blow out the budget deficit and the risk is that his protectionist policies will set off a trade war, and along with much higher consumer prices and immigration cut backs will boost costs. All of which could ultimately mean higher inflation and bond yields and a faster path of Fed rate hikes in the US (apart from any initial delays associated with uncertainty around his policies).
There may also be negative geopolitical and social consequences – tensions with US allies, reduced inflows into US treasuries in return, a more divided America – if Trump follows through with policies on these fronts.
Australia being more dependent on trade than the US (exports are 21% of GDP in Australia against 13% in the US) will be particularly vulnerable if Trump were to set off a global trade war.
The ultimate impact will depend on whether we get Trump the populist (determined to push ahead with his protectionist policies and steam roll Congress) or Trump the pragmatist (who backs down on his more extreme policies, eg. around protectionism) leading to a smoother period for the US and global economies. If we get Trump the pragmatist there is a good chance the US will see a sensible economic stimulus program combined with long needed reforms in areas like corporate tax.
Likely market reaction
The last few weeks – with shares and other risk assets falling when developments favoured Trump and rallying when developments favoured Clinton – indicates Trump’s victory will not go down well with markets. In fact we have already seen this with the initial reaction in Asian markets:
- Trump’s victory is seeing a resumption of “risk off” with shares likely to fall 5% or so (both in the US and globally – although Asian and Australian shares have already reacted to some degree) and safe havens like bonds and gold rallying as investors fret particularly about his protectionist trade policies triggering a global trade war. Australian shares are particularly vulnerable to this given our high trade exposure. The “global shock” of a Trump victory will likely see the Yen and the Euro rally further against the $US but the $US rise further against the Mexican peso and trade exposed countries in Asia.
- While the Fed will be a bit less likely to hike in December with a Trump victory, the $A will likely suffer from the threat to trade and the initial “risk-off” environment. A Trump victory to the extent that it leads to falls in investment markets and worries about a global trade war, may also increase the chance of another RBA rate cut in Australia – but not until next year.
- Beyond the initial reaction, share markets are likely to settle down and get a boost to the extent that Trump’s stimulatory economic policies look like being supported by Congress, but much will ultimately depend on whether we get Trump the pragmatist or Trump the populist. Congress, along with economic and political reality, can probably be relied on to take some of the edge off Trump’s policies to some degree, but this would take time. But a more pragmatic approach by Trump to economic policy would probably see the initial market reaction present investors with a buying opportunity.
Historically since 1927 US total share returns have been weakest when Republicans controlled the presidency and Congress with an average return of 8.9% p.a.
Source: Bloomberg, AMP Capital
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