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WILL PRESIDENT TRUMP’S CAMPAIGN PROMISES PROVE TO BE A “HEAD FAKE”?

10 November 2016 at 6pm

Jonathan Armitage Chief Investment Officer MLC

We’ve lived through enough elections to know that passionate slogans during an election campaign often do not make it through to implemented policy. However, there are many aspects to President Trump’s campaign positions that have consequences for global investment markets.

President Trump’s election is a setback for globalisation and free trade. The repudiation of international trade deals such as the North American Free Trade Agreement and the Trans-Pacific Partnership Agreement are now a real possibility.

Globalisation, the integration and interdependence of countries and markets is generally good for company earnings and profitability. Companies can operate efficiently and access distant markets as easily as they can domestic markets. Credit is accessible and money flows across borders, increasing demand from customers. But it also increases competition and some companies can no longer ‘hold their own’ in industries they were once able to. The US has gradually seen the fall in profitability of their manufacturing industries which is the reason why reducing immigration, increasing tariffs and additional taxes on imports has been politically positive rhetoric. Yet the damaging impact of trade restrictions has flow-on effects for US economic growth which outweigh the boost they may get from any artificial pick-up in profits from globally uncompetitive industries.

While the surprise election of Trump is being likened to the UK’s decision to exit from the European Union, the consequences of a Trump Presidency are more far-reaching. Brexit primarily impacts the UK economically. President Trump’s policies are more likely to be damaging for countries other than the US if trade barriers are erected – corporate profitability in developed and emerging markets will be impacted. The risk premium required by investors may well start to rise, causing the revaluation of assets across investment markets.

Whilst the Republicans have won both houses in Congress, the party is clearly not united. No eminent or experienced Republican endorsed Trump. Mike Pence, the Vice President-Elect, may well emerge as a powerful figure as he will be vital in mending relationships between Congress and the White House. Leader of the House, Paul Ryan, also has the task of mending a fractured Republican party.

One of President Trump’s initial challenges may be selecting key Cabinet members and economic personnel. The lack of specific detail on Trump’s economic plan is challenging for investors. What little we know of Trump’s policies seems to be inflationary. Increased infrastructure spending and pledges to maintain social security spending, will add significantly to America’s budget deficit. The bond market has reacted adversely to the election outcome with yields rising sharply. We consider this a warning sign as fixed income markets are customarily an acute gauge of risks.

The initial US share market rally appears to contradict the notion that corporate profit margins and share market returns have been the main beneficiaries of globalisation. US shares have been surprisingly resilient in the initial response to President Trump’s victory. Financials shares have benefited from potential repeals in regulation, Health Care from a potential repeal of Affordable Care Act (Obamacare) and Energy from a President Trump open to increased onshore investment.

Whether any of President Trump’s campaign promises turn out to be “head fakes” will eventually be revealed. The future path for investment markets is never predictable; that’s why we don’t back one particular future when positioning our portfolios.

Important information

This communication is provided by MLC Investments Limited (ABN 30 002 641 661, AFSL 230705) (MLC), a member of the National Australia Bank Limited (ABN 12 004 044 937, AFSL 230 686) group of companies (NAB Group), 105–153 Miller Street, North Sydney 2060. An investment in any product referred to in this communication is not a deposit with or liability of, and is not guaranteed by NAB or any of its subsidiaries.

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