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Investment implications of Trump presidency

Americans have voted to put Donald Trump in the White House and left Republicans retaining their majority in the House and also a narrower Republican majority in the Senate.

The Trump victory is another manifestation of a powerful force that is sweeping the world - a growing deep-seated distrust and disillusionment with career politicians and elites. The past couple of decades of globalisation has benefited mostly the rich and resulted in rising inequality, stagnant or declining real wages for workers, and the loss of many jobs to emerging markets and robotics. Unemployment rates in the US are down to 5% from their 10% peak in 2009, but there are still many tens of millions of people who have given up looking for work and so are not counted in the unemployment numbers. Add to this the rising racial tensions that have plagued America for centuries.

Change is inevitable in the world. The good thing about the US election is that it has resulted in political change via a relatively peaceful democratic process without revolution or civil war.

The main message is: don't make sudden panic moves. Following the herd and panic buying in booms or panic selling in busts is the biggest destroyer of wealth for most investors.

US economy

  • Many of Trump's policies are stimulatory - including personal tax cuts, corporate tax cuts, increases in infrastructure and defence spending, winding back banking deregulation and winding back business regulations. These are largely the policies of the traditional Republicans who control the Congress and so many will have a good chance of being legislated.

  • Interest rates and bond yields - Federal Reserve chair Janet Yellen is probably safe to serve out her term despite Trump's promise to fire her (he has no power to do that). The Fed's careful plan to raise interest rates slowly will probably keep interest rates low for the foreseeable future. If anything, Trump is likely to add a more 'hawkish' bias to the Fed board, which would do more to lower rather than increase growth, inflation and bond yields.

  • Trump's promise to deport 11 million Mexicans and build a wall to keep them and get Mexico to pay for it - all seem unlikely to be carried out in full. However any money spend on increasing border protection would be stimulatory.

Trade

  • Trump's promises to tear up or at least renegotiate trade agreements, and to slap high tariffs on China and Mexico are unlikely to get full support in Congress. Global trade flows have been declining since the GFC. Although the WTO mechanisms have prevented an all-out global trade protection war, each country has been raising protection in key industries behind the scenes. This is likely to continue while unemployment remains a problem especially in Europe.

Military

  • Trump appears isolationist and he says he wants to retreat from foreign military involvements. Much of the grass roots supporters were against the US torturous entanglements in Afghanistan and Iraq. Although he may wish to withdraw, this has proven extremely difficult to achieve. Despite the rhetoric he is likely to be forced to continue US involvement in Asia against the rising global threat to US supremacy, China. China is also America's biggest creditor and supplier of the capital to fund America's stimulus and defence spending.

  • One of the few things a President can do without Congressional approval or support is to start wars. Trump's isolationist stance means he is unlikely to start a war, but he also appears to be a volatile character who may react illogically if pushed. Although he doesn't need Congressional approval, he will know that there is no point starting a war if he knows Congress will not finance it, as Congress controls the budget.

Some likely implications for Australia

  • Shares are likely to follow the lead from US markets as they have done for the past century. Since most of Trump's policies are pro-business and stimulatory, the US markets are likely to be largely supportive (despite the usual regular sell-offs from time to time)

  • Industrial commodities prices - would be boosted by Trump's promised infrastructure and defence spending plans. However the main driver of demand is China, where government is also likely to continue to prop up economic growth and jobs with stimulus spending.

  • Gold may do well in the short term, but any sustained rally would require a return of runaway inflation or a complete breakdown of the US or global banking systems and a return to a barter economy, both of which are unlikely in the foreseeable future. The brief US downgrade crisis in 2011 saw gold to jump to $1900 per ounce but that was quickly forgotten and the bubble burst. It may be that the stimulatory policies increases US inflation, but runaway inflation is unlikely given the excess capacity and deflation in Europe, China and Japan.

 

Ashley Owen is Chief Investment Officer at independent advisory firm Stanford Brown and The Lunar Group. He is also a Director of Third Link Investment Managers, a fund that supports Australian charities. This article is for general information and does not consider the personal circumstances of any individual.

 

8 Comments
SlapThatManInTheMirror
November 12, 2016

If you are a risk bloke and missed this you were asleep at the wheel. Again. I even read one was calling it a black swan event. Rubbish. Look at the possible outcomes - there were only ever two. Consider the probabilities, consider the consequences. Cover them. It's not that hard.

Been There B4
November 12, 2016

I understand that without Polish and other migrants, Londoners would be whistling in the wind for people to provide hospitality services industry, building tradespeople and more.

What were Nick's folk in Cambridge doing to suppoet the UK economy.

BUT I recognise they can vote based on their perceptions.

Rick
November 12, 2016

When I was in the UK in July, I met a couple from Cambridgeshire who believed their way of life had been destroyed by Polish immigrants. All my friends from London were completely unaware of this view, and I realised that Trump had a chance because the media and the 'establishment' were not listening.

I suspect the same seeds of discontent are in Australia. However, they are masked by property price rises that have diverted middle class attention from the fact that many other aspects of their life are unsatisfactory. Pauline Hanson is not the messiah, but she just might be John the Baptist.

Nick Xenophon? Cory Bernardi? Perhaps. But I suspect Malcolm Turnbull is a dead man walking.

Chris
November 14, 2016

I agree. I am a UK-expat here and two years ago during a conversation with my also expat (Yorkshire born and bred) barber, I told him I was going back for a holiday. I don't live in London, I'm in the North of England but not where he's from.

He said "Can you speak Polish ?" and I quizzically looked at him, having not been back since 2003. He explained what had happened. I couldn't believe it until I saw it myself.

There is a lot of resentment from the older Brits who are seeing East European tradies coming in and massively undercutting them, with workmanship that is not the same standard as a British tradie. This is not "Auf Wiedersehen Pet" by any means.

London always has and always will live in a bubble, insulated from the outside world that is "the rest of England". If it happens outside of London in another part of the country, they don't care or likely even know where it is.

Jerome Lander
November 12, 2016

Brexit was a 'Surprise'. Trump was a 'Surprise', even after Brexit!
Given major upcoming political events occurring in Europe, and the significant discontent with the status quo, should we not expect further political 'Surprises' there?
It is hard to imagine that European 'surprises' will be bullish for risk assets.

It has been quite obvious that we should have been expecting higher volatility, and we appear likely to get it given the likely effects on currencies and bonds.
Higher volatility means the risk of holding risky assets is higher, at least in the short term.
Combined with higher interest rates and inflation, this means discount rates - used to value asset prices - should be higher, potentially resulting in lower asset prices despite higher growth.
It is certainly difficult to argue that higher asset prices have not been associated with highly stimulative monetary policy, despite earnings growth being lacklustre.
The euphoria around a growing economy and deficit spending should hence be placed in context. The uncertainties remain large and numerous significant risks remain.
The confidence in high allocations to passive bond and equity portfolios appears greatly misplaced in this context.
True alternative allocations are likely to grow significantly among those considering the above issues, given the medium to longer term returns from equities, bonds and property are likely to be lacklustre for the risks taken.
Good alternatives need to provide competitive returns while diversifying exposures and returns. They tend to be capacity limited and many are simply not available to bigger institutional investors, but can be accessed by smaller investors who don't want to be entirely at the whim of the above issues.

Ken Ellis
November 12, 2016

I don't like the man but could be what we need. Present western economic thinking is locked in the past and not working. Why we keep doing more of the same is not logical. I am a supporter of infrastructure expenditure as it assist the future on a long term basis while most other forms are short term and based on getting the ruling elite reelected.

Eddie Pop
November 12, 2016

You won't need Congress to finance a war if everyone is dead or dying from a nuclear attack as a result of retaliation from a push of the button from one Donald J Trump.

Waren Brainard-Smith
November 12, 2016

Ashley,
Very good article and I believe extremely useful to help Australians who may not be that familiar with what makes the US tick. In my opinion, if you take a close look at the results, the not so silent majority, finally shouted for change. I also think that China is being put on notice for yuan manipulation The best and the worst is yet to come.
Regards Warren Brainard-Smith M.S, MBA, ABD PhD

 

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