What are the global investment implications of the Trump presidency?
As the world awaits the global implications of this new world of politics, it’s prudent to examine what moves Donald Trump may make as US President and how this may impact on investors.
With new leadership and an ambitious fiscal agenda, all eyes are on the US economy
Trump’s election commitment to support urban renewal and infrastructure should see him follow through with spending (albeit possibly more slowly in infrastructure), which is likely to be positive for the US economy as it has the potential to create jobs and growth. And in an effort to make the US energy independent, he is expected to try to resuscitate the coal industry (and likely fail for a multitude of reasons) but shouldn’t do anything to damage renewables as solar employs more people than coal.
Trump has been very vocal about taking a tougher trade stance with China and Mexico, and this is certainly a risk. However, in our view, while some action seems likely, we expect it to be in the form of small changes to rules, which Trump can point to as a victory, but that won’t change relationships too much. Recall that raising tariffs on Japan was the first thing Ronald Reagan did, as did George W. Bush on Korea. And neither sparked a trade war. That said, we recommend keeping watch for hints of more significant trade actions that could prove more disruptive.
US consumer confidence is boosting an already strong economy so investment exposure is prudent
Confidence has been solid and growing for some time well before the election, with steady inflation and a stronger job market and we believe that the US economy should continue to be one of the most stable in the developed world. But to fulfil his promise to increase the country’s productive capacity, Trump wants to spend big, which will cause the budget deficit to rise, potentially quite sharply. If the spending translates into economic growth, it may cause the debt position of the US to actually improve over time as the US could grow its way out of debt. But if not, it could be setting itself up for a pretty serious debt fight.
While listed stocks and bonds continue to be overvalued in our view, the US Federal Reserve (US Fed) finally abandoning its zero interest rate policy could be the catalyst for a negative re-rating in these markets. Stocks may not come down so sharply if corporate tax cuts lead to increasing profits to offset higher interest rates; however, for bonds its harder to paint a positive scenario, though buying opportunities could arise in the future. To that end, we advise caution on listed stocks and fixed income and suggest looking at more attractively priced infrastructure and property assets, which should hold their value and perform better under those scenarios.
Over in Europe, deep political upheaval led by Brexit and Trump makes it a market to avoid
With a very busy election calendar in Europe (Italy, the Netherlands, France and Germany) there is concern that Donald Trump’s surprise victory could embolden people to also vote against the establishment. In particular, there is growing sentiment of a ‘Frexit’ referendum, which would be a huge shock. It’s one thing for Britain to vote to leave the EU – they at least have their own currency – but France leaving is something different altogether.
Europe still remains a market to avoid and notwithstanding the elections, the European Central Bank will likely start to wind back it’s quantitative easing program, particularly if the US Fed starts raising interest rates and there is likely going to be some big downward moves.
The impact on Australia by the changing of the guard in the US is much harder to predict
The International Monetary Fund has specifically called Australia out as a ‘binge borrower’ because over the last 20 years our total household debt-to-income ratio has climbed to become one of the highest in the developed world. Most of this debt is in housing and as such, it’s prudent to keep an eye on what happens in the US as an acceleration towards higher rates could place a lot of pressure on Australia. That said, if Trump does fast-track infrastructure spending, it could result in an important boost for our own resources sector.
In any event, if there is a return to some inflation in Australia, real assets like commercial property will fare better than stocks and bonds. And of course Australia benefits from a floating currency. What’s important right now is to keep a healthy balance. We generally recommend holding some US dollars and if you’re considering investing in Asian and Emerging markets, look at their domestically focussed stocks rather than large, international names.
The new look White House is not as disastrous for markets as many thought
The US system is designed to withstand major shocks, and as Warren Buffett, one of the world’s most successful investors said in the run-up to the US election: “I will predict that if either Donald Trump or Hillary Clinton becomes president, we’ll do just fine.”
“For 240 years it’s been a terrible mistake to bet against America, and now is no time to start.”
This insight may contain general financial advice and was prepared without taking into account your objectives, financial situation or needs. Before acting on any advice, you should consider whether the advice is appropriate to you. Seeking professional personal advice is always highly recommended. Any forward looking statements are based on current expectations at the time of writing. No assurance can be given that such expectations will prove to be correct.
Walsh & Company is a wholly-owned subsidiary of Dixon Advisory Group.