‘President Trump’ veers to isolationism
If the Republican nominee takes the White House in November, his policies would put brakes on globalisation
The first US Presidential debate between Hillary Clinton and Donald Trump was the most watched ever, breaking the previous record set in 1980 (between Jimmy Carter and Ronald Reagan).
At one stage during the lead-up, Clinton’s lead had narrowed to just one percentage point. Aside from offering huge entertainment value, the debate was eagerly anticipated given such a tight race.
Early signs in the aftermath suggest Clinton came out on top.
Financial markets seemed to draw the same conclusion, with US shares rising the day following the debate, and the Mexican peso also strengthening (Mexico would be a key loser from a Trump victory).
However, with two more debates and plenty of campaign theatrics to come, we shouldn’t underestimate Trump’s chances. The antiestablishment undercurrent that would rather take a risk on Trump than continue under the status quo is strong. If he does pull it off, there are a few things financial markets and investors can expect:
Higher US interest rates
Donald Trump is not a big fan of the Federal Reserve chairwoman Janet Yellen or her deputy, Stanley Fischer. He thinks the Fed is acting somewhat irresponsibly (and politically) by keeping interest rates as low as they are. Yellen and Fischer might not last long under Donald Trump, and new appointments could be inclined to increase rates at a faster pace.
Growth in America could actually improve. Trump wants to cut taxes, and raise spending on defence and infrastructure. This fiscal stimulus would likely increase US economic growth, in the short-term at least. This would come at the expense of other parts of the world, such as China and the emerging markets.
We’re not likely to be in the firing line for Trump’s antitrade policies as much as others, but we can probably give up on the TPP.
A stronger US dollar
The combination of higher interest rates, as well as stronger economic growth would likely see the US dollar rally against most other currencies, including ours. The US is our fourth largest export market, taking 11.7 per cent of our goods and services. As a result, we should see benefits from a stronger America and a rising greenback. We’re not likely to be in the firing line for Trump’s anti-trade policies as much as others, but we can probably give up on the TPP.
US companies will benefit, at the expense of multinationals
The key aspect of the Trump agenda is protectionism, which is the opposite of globalisation and free trade. He wants to bring manufacturing back to the US, impose hefty tariffs on Chinese and Mexican imports, and become much more insulated from the rest of the world. US companies with mainly domestic customers will benefit from that, but multinationals won’t.
We could see an inflation start to increase
Globalisation has been a key driver of deflationary pressure in recent decades, as low-cost producers and extra capacity in places like China has pushed prices lower. If Trump gets the ball rolling for the rest of the antiglobalisation movement, we could see some of those trends reverse. A surprise inflationary spike could swing the balance away from highyield investments toward those with a growth tilt, and add to upward pressure on interest rates.
Expect a sell-off, then maybe a recovery. Markets would react the same way they did to Brexit. Shares would fall, higher-risk currencies would be sold off and safe-haven assets like gold would rise. However, before too long we could see a rebound as some policies were interpreted as being better for growth, and if it became clear the checks and balances in Congress would keep him from doing anything too outlandish.