Special Edition - A Trump Presidency
Donald Trump’s victory in the US Presidential election initially sent shock waves across the world. Even many Republicans were surprised by the party’s unexpectedly strong performance, which will see it keep a majority in both the Senate and House of Representatives, as well as winning the Presidency.
It appears that middle-class Americans, who provide the bulk of tax revenue, want a President focused domestically, rather than internationally. Trump’s win has been described as ‘revolutionary’ and ‘a vote against the political status quo’.
But what does his surprise victory mean for Australian investors? And how should you respond?
The new President’s policy priorities
Donald Trump will be sworn in as President on 20 January 2017. Once he comes into office, his domestic political priorities are expected to be:
- Cutting company tax from 35% to around 20 – 25%
- Cutting income tax, with three basic rates: 12%, 25% and 33%
- Scrapping Obamacare
- Increasing spending on defence by US$450 billion and Veterans’ programs by US$500 billion
- Introducing a US$300 billion infrastructure spending program
- Taking a tough stance on immigration, with promises to clamp down on both legal and undocumented immigrants
Looking beyond the US, Trump has pledged to introduce a much more aggressive trade policy, including:
- naming China as a currency manipulator and putting tariffs on some Chinese imports
- changing the terms of the North American Free Trade Agreement (NAFTA) and
- abandoning the Trans-Pacific Partnership (TPP)
It is still unclear whether the new President will be able to act unilaterally on trade policy, or whether he will be able to win the support of Congress to change current policies, especially treaties such as NAFTA.
Meanwhile, his energy policies are also likely to have implications worldwide, including a pledge to reduce drilling regulations on oil companies and reverse some climate change policies.
How markets reacted
Markets completely got the US Presidential election wrong last week, but ended with good gains nonetheless. The week began with the view that “Trump should not win, but if he does markets will tank.” As it turned out, Trump won but the market melt-down lasted only a few hours, with Trump’s conciliatory victory speech quickly soothing market fears, and enabling the Dow Jones to reach a new record high.
What happens next may depend on the signals the President-elect gives on the likely direction of his new administration. Many will be hoping to see him maintain the conciliatory and pragmatic tone we heard in his victory speech, rather than the more hard-line rhetoric of the campaign itself.
In terms of Trump’s economic policies, markets are particularly excited about fiscal stimulus through tax cuts and increased spending on defence and infrastructure (bridges, roads, buildings, power supplies etc). This is helping construction and defence related stocks on Wall Street. In turn, our resource stocks who provide the materials for infrastructure, have enjoyed a stellar run.
Trump’s other economic policy, reduced regulation, is also bullish for financial and health care stocks. The prospect of increased US fiscal stimulus is bullish for the USD and will add to upward pressure on bond yields.
What it means for investors
Over the longer term, a Trump victory has both positives and negatives for Australian investors. The policies he has announced are likely to be highly stimulatory. Assuming he is able to get them through Congress (now more likely, given the Republican majority), a combination of tax cuts and big new spending programs could speed up economic growth and boost the US dollar.
That could see shares climb higher — especially companies with large cash holdings offshore, or those likely to benefit from Trump’s nationalistic policy focus.
However, in the medium term, a more expansionary policy could increase inflationary pressures, increasing the likelihood that the Federal Reserve will raise interest rates more aggressively. The market still remains firmly of the view that the Fed will raise rates next month.
Any possible boost to economic growth and earnings from fiscal stimulus needs to be counter-balanced with the likely added upward pressure on bond yields and inflation. Indeed, it should not be forgotten that the US economy already has a fairly tight labour market, as evident with a now clear upward trend in wages growth.
Meanwhile, Trump’s trade policies and increased tariffs are also likely to be inflationary, potentially weakening the US economy and sharemarkets.
How should you respond?
Markets rise and fall from day to day — but as an investor, it’s cashflow and the long-term growth outlook that truly matters. That means it’s important to stay focused on your long-term goals and hold the investment portfolio most likely to help you achieve them.
We can help you make sure you have the right investment mix for your individual situation, avoiding emerging risks without sacrificing opportunities for growth. If you’re concerned about the effects of recent market movements on your investments, please contact us.
If you have any questions or would like clarification on the above, please contact us at email@example.com.