- There will be much volatility. This is a trite statement. The world will be watching for signs of a Hard Trump versus a Soft Trump. As he announces his cabinet, the choice of candidate will be indicative of a Hard or Soft Trump and markets will react accordingly. Most appointments will need Senate simple majority approval. The Republican Senate majority is a slim one, 52 to 48, and markets will react to the approval prospects of each candidate as they are proposed.
- Strong USD. High probability, durable trend. Supported by multiple facets of policy.
- Strong US equities. May not be as durable. We are late in the business cycle, equities are expensive, and interest rates are rising.
- Weak US bonds. It’s complicated.
- Duration has sold off and may continue to sell off. However, there are limits.
- Interest rates cannot be allowed to rise too much as the national debt is too large and will get larger under the Trump fiscal plans.
- US credit. Uncertain. Exercise caution in credit.
- For credit spread the prognosis is even more complex. Normally and in recent history, rising rates have coincided with tightening spreads.
- However, US companies have increased leverage significantly since 2013, on average by some 50%. Higher rates will increase debt service costs, increase default rates and reduce recovery rates.
- Weak Emerging Markets
- Weak EM currencies. This is the dual of a strong USD and therefore sustainable.
- Weak EM bonds. EM bonds will move in tandem with US bonds as countries try to stabilize their currencies.
- EM trade reliant countries to suffer.
- EM commodity countries to profit.
- Europe. Highly volatile from internal and external macroeconomic and political factors.
- Political risk is high from Italian constitutional referendum in December, Dutch elections in March, French elections in May, and German elections in October.
- Brexit continues to hang over the EU.
- The geopolitical risks are even more complicated with Trump de-emphasising engagement with NATO.
- Europe is America’s largest trading partner in gross terms. The EU is the 2nd largest exporter and the second largest importer to and from the US. The anti-trade stance of the US will impact European growth. Like Asia and the TPP, Europe can expect the TTIP to fall away.
- China exports to the US had peaked in 2015 in any case. Trump’s trade policies will only accelerate this trend.
- China’s economy is already well in the process of rightsizing its manufacturing sector to face a domestic demand base.
- An insular US presents China with opportunities to subvert the US hegemony by building bridges while the US builds walls.
- Advance new trade pacts such as FTAAP to replace TPP.
- Advance the AIIB agenda.
- The Chinese economy has stabilized from the slowdown last year.
A summary survey of Trump’s policies
Trump is calling for a substantial, deficit-neutral, new infrastructure plan involving transportation, water, telecommunications and power.
The plan is positive for growth generally but will likely be inflationary. It will be difficult to be deficit-neutral given that Trump plans tax cuts at the same time.
- Good for equities. The fiscal plan will not be deficit neutral and the fiscal boost will raise growth potential in the medium to long term.
- Neutral to bad for credit. Rising interest rates are usually good for credit spreads if recent history is a guide. However, balancing improving growth is the fact that US corporates have increased leverage by some 50% since 2013 and rising rates will put pressure on debt service. Expect higher default rates and lower recovery rates.
- Bad for bonds. A fiscal boost is inflationary which will lift rates across the yield curve as well as provoke the Fed to raise rates more aggressively.
- Good for USD. Rising bond yields, higher growth and a more aggressive Fed are all good for USD.
How feasible is the infrastructure plan? Congressional Republicans will ask how the infrastructure plan can be deficit neutral. There is risk that the plan will be downsized to prevent a surge in the deficit.
Trump will withdraw from the TPP, renegotiate NAFTA, label China a currency manipulator, and bring action against China under the WTO. He intends to pursue a nationalistic agenda, which while labelled free trade, will likely reduce it.
- Bad for TPP and NAFTA countries. This will impact their economies, especially on the trade front. However, note that global trade is already in a depression prior to the US election. Likely to impact their currencies, equities and bonds.
- Opportunity for China to drive its own trade deal. China is already proposing a Free Trade Area of the Asia Pacific.
- A Regional Comprehensive Economic Partnership is likely to be completed between Asia Pacific countries which will address tariffs but will be less comprehensive as it excludes non-tariff barriers.
- Bad for inflation and growth. Reduced trade reduces the non-inflating rate of growth of an economy by making it less productive. This introduces stagflation risk.
- Good for USD. As the US is a large net importer, and therefore a large exporter of USD, trade barriers reduce the supply of USD.
Chances of approval in Congress are high. However, the world cannot be de-globalized in a day, or a presidential term. Global supply chains are highly globalized and anti-trade policies will hurt US companies as much as foreign countries. Expect them to lobby hard in their own interests.
Trump plans to reduce personal and corporate taxes significantly. Notably, business rates will be lowered from 35% to 15% and a one-time deemed repatriation tax of10% on corporate profits held abroad.
- Good for equities. Tax cuts are very simulative and pro-growth.
- Bad for bonds. Tax cuts are inflationary. Expect bond yields to rise across the curve and the Fed to be more hawkish.
- Good for USD. Rising rates and bond yields are good for USD. In addition, the risk of repatriation of foreign held profits is very supportive of dollar strength.
Congressional Republicans will be very supportive of tax cuts. However, they will balance this with the increased expenditure on infrastructure and defence. The tax cuts are more likely to find agreement with compromises struck on the expenditure items.
Trump intends to repeal and replace the Affordable Care Act. He will retain features of the ACA such as cover of pre-existing conditions. Trump’s criticism of the ACA is rising premiums, rising deductibles, and rising costs.
- Good for pharmaceutical and biotech companies.
- Uncertain for hospitals and healthcare. Beneficiaries of the ACA face an uncertain future. Not all the features of the ACA will be dismantled as the program has become entrenched.
Trump intends to make the US energy independent and in particular unleash America’s 50 trillion USD of untapped reserves. He intends to rescind Obama’s executive actions which he calls job-destroying and intends to eliminate barriers to responsible energy production.
- While the fortunes of E&P equities are more driven by oil prices and OPEC, MLPs are driven by volume of throughput.
- Marginally supportive of oil prices. However, oil is more sensitive to OPEC’s decisions.
It is under immigration that Trump’s notorious Mexican Wall is classified. It is not clear if the wall will be built or if the Mexican’s will be inclined to pay for it but the policy generally seeks to prioritize Americans’ jobs, wages and income security. Immigrants will need to be financially self-sufficient and accretive to the prosperity of the USA.
- Certain sectors will experience a labour squeeze.
- Including potential deportations, tighter entry requirements are likely to reduce labour force growth and be inflationary. The Fed has also been explicit that the economy is operating close to full employment. Negative for bonds.
Trump intends to cut waste and unnecessary regulation across all departments and reform the entire regulatory code. He intends to cancel all illegal and overreaching executive orders.
- Good for banks, pharma and biotech. The most heavily regulated industries will benefit from the cutting of red tape and the excising of regulations.
The Senate Republican majority is small and the Democrats have a strong and respected advocate of more financial regulation.
On the economy
Boost growth to 3.5 percent per year on average, with the potential to reach a 4 percent growth rate.
This is exemplary of Trump’s policies. There is little justification or validation for the claim and the likelihood of achieving the targets are low.