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Trumped?

The dawning of the Trump era surprised many and markets will be volatile on the uncertainty it creates.  Like Brexit, stock markets may fall initially but soon regain composure.  The best day to buy may have been the day after the election while a Trump possibility was digested.  Regardless, we do anticipate continued market volatility ahead as the possibilities are assimilated and uncertain policy changes are clarified.

Tax-Cuts and Fiscal Spending:

Nailing down actual Trump policies is tricky, but they may stimulate medium term US growth with fiscal spending, tax cuts and infrastructure upgrading – whilst avoiding the US health sector, with Obamacare now at risk.

The Republicans will control Congress, so Trump may be able to pass his intended policies, albeit at the risk of compromise with party leadership, which brings possible legislative gridlock.  Even so, assuming they are enacted a year or two out, Trump’s policies on taxation could support growth as long as they are not encumbered by trade war (see below).

Lower federal taxes and potential removal of estate taxes would aid household marginal incomes and wealth.  Meanwhile, a lower corporate tax rate should incentivise investment in the US. Infrastructure spending should boost growth amid rock-bottom interest rates.

Trade Relations:

US Presidents have most influence over foreign policy and trade and as Trump policy will be more isolationist, international relationships could change substantially.  This may mean more confrontational trade with China, while tensions with Russia could decline.

Both Trump and Clinton are opposed to the Trans Pacific Partnership, which would have benefited Australia.  But Trump has gone much further on international relations, raising the possibility of tariffs and re-negotiation of existing trade agreements.  This path would create lasting uncertainty for firms planning to invest in the US and export globally, with cause to expect other countries would retaliate.  Companies may also perceive US growth risks making them unwilling to spend on expanding their domestic production and distribution capacity in the US.

Also, a number of Trump policies like building a wall to Mexico, calling China a currency manipulator and deporting immigrants might broadly enflame foreign relations.  This could potentially result in repeated waves of financial market uncertainty.

A net positive to Australia might be increased migration, boosting our economy and housing demand.

Implications for China:

US-China relations carry the greatest risks for the global economy.  China’s development in recent decades has boosted the global economy on many fronts:

  • efficient production of manufactured goods, which helped keep developed world inflation contained;
  • greater availability of financial capital, as foreign exchange recycled into developed world markets; and commodity demand.

The rise of China’s middle class brings further benefits for the global economy via increased services trade and financial integration.  Persistent diplomatic tensions between the US and China may put these drivers of global growth at risk.  Obviously, Australia is materially exposed to developments both in resources and services demand.

Implications for Australia:

So for Australia, the key issue will be the impact of potential trade policies on China.  However, China has been moving towards a service driven economy and has ample policy flexibility to boost domestic demand to partially compensate for any direct shock to exports to the US.

Implications for Investors:

Markets are likely to trade cautiously for some time ahead.  Most analysts have begun slightly downgrading their short term global growth forecasts, particularly due to the shock to business confidence and hence investment.

The Fed (US Central Bank) is now unlikely to raise interest rates in December, as financial conditions tighten and uncertainty in key areas of the US economy takes hold.  Market probability for a December rate rise was over 80% but is now about a 40% chance.  But if inflation-inducing tax and spending policies are enacted, US rates could rise faster than previously expected.

In Australia, the chance of another rate cut now seems more likely, depending on stimulation from any Australian dollar depreciation.  The possibility that interest rates will remain lower for longer may assist consumption, construction and infrastructure but increased uncertainty could weigh on business confidence and investment.

Our client portfolios are typically ‘neutral’ weighting to equities with surplus cash and deposits to take advantage of any opportunities to buy high-quality assets more cheaply.

While the US Presidential election is important, investors should focus on their financial objectives, ensuring their portfolios are well diversified across asset types and geographies, taking a long-term view.

If you would like to discuss the information in this article or your investment options with one of our wealth management professionals, get in touch today!

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Disclaimer: All information in this article is intended to be general in nature for discussion purposes only. So you should not rely on it and seek personalised professional advice before making any decision.