Trump pump and slump?

Written on the 23 October 2016

The prospect of Donald Trump as US President seemed like a fantasy only a year ago, and yet, here we are today watching a Clinton v Trump election race. The uncertainty around Trump means Australia, and the world, are taking a closer interest than in the past. Betting markets place Trump at a 25% chance of winning, but he held a narrow lead in the polls only a month ago. We consider what a Trump presidency could mean for the global economy and markets.

How did we get here - the Trump card

Globalisation and deregulation has boosted economic activity across the globe, but the rewards have not been evenly distributed and inequality has increased. In the US, real income has stagnated for most since the 1980s, while the wealthiest 10% of households have doubled their real income^. Since the Global Financial Crisis, it has been harder for people to borrow money and therefore made it more difficult to maintain basic household needs.

Trump speaks to a frustrated section of the US playing on their fears and hopes and it's been a successful strategy for him. He's not the only one. This is a global trend which has seen the rise of Nigel Farage (UKIP in the UK) and Beppe Grillo (the Five Star Movement in Italy).

Three potential consequences of a Trump presidency

US Presidents often find themselves unable to pursue their complete agendas when they reach office due to judicial and congressional limits this was certainly the case for many of current President Obama's policies. Aside from that, though, Trump may impact on three specific areas.

1. Faster growth in government spending and larger budget deficits.
2. Less globalisation and tougher immigration rules.
3. Less monetary policy support from the US Federal Reserve (Fed).

Strangely enough, this might all benefit the US in the short term, as foreign goods are replaced by domestic. The long-term picture may not be as rosy.

An invested outcome

The lead up to the US elections and a potential Trump win is likely to result in uncertainty and volatility in investment markets.

+ Bonds tend to benefit initially from investors seeking safer assets.
+ The US dollar may increase in value off the back of any policies Trump implements and the prospect of the Fed increasing interest rates.
+ Most commodities may suffer from a higher US dollar though gold may increase in value from the uncertain environment.
+ Uncertainty may create short-term volatility in share markets but longer-term activity will depend on the policies implemented post the US election.

Conclusion

The rise of Trump is part of the global trend towards greater political instability. Even Australia is not exempt if you consider the close and delayed results of the recent Federal Election. Elections are likely to have greater influence on investment markets and investors will need to manage the uncertainty of these in their portfolios. A Trump presidency may not turn out to be a complete negative but there are a large range of potential outcomes, especially when compared to the status quo represented by Clinton.

^Datastream

Disclaimer
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