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18 Nov 2016 00:00
On the morning of November 9, as the prospect of a Trump victory emerged, markets panicked.
ANALYSISWhether Hillary Clinton or Donald Trump emerged victorious in the United States presidential election, the result was always going to be a second-best outcome for global economies and markets — both candidates were widely regarded as weak.
Given the bias in polling data towards a Clinton victory, the results of the November 8 presidential election came as a surprise to many voters and many political experts believed that the race was “Clinton’s to lose”.
On the morning of November 9, as the prospect of a Trump victory emerged, markets panicked: Japan’s Nikkei 225 stock index slumped 5.4% and the dollar moved sharply weaker. A little later the FTSE 100 dropped by 146.8 points, or just over 2%, at the opening, and the Dow Jones Industrial Average futures at one point slumped by more than 800 points, or 4.2%.
These market moves captured the immediate nervousness created by Trump’s divisive and erratic campaign.
TransformationThen came Trump’s victory speech, in which he appeared to have transformed from a demagogue into a statesman.
As the president-elect spoke, a sense of calm returned to capital markets, with sentiment improving. Markets shifted from scathing to forgiving in the space of Trump’s 15-minute speech. After a campaign marked by threats to build physical and metaphorical walls and create a more isolated US, the conciliatory speech served to elevate Trump to a more presidential status.
But it will take time for the full effect of a Trump presidency to emerge. The immediate expectation is for capital markets to be faced with greater uncertainty. Nevertheless, the statesman who emerged on November 9 was constructive and, in some regards, even impressive.
Trump promised to “double our growth and have the strongest economy anywhere in the world”. Of course, the economic consequences of this election result will be far less dramatic than imagined and they will depend not only on the extent to which Trump tempers his stance and the policy decisions he takes, but also on the administration he installs and the moderating effects of the institutions around him.
It is worth bearing in mind that Trump’s presidency is attached to a Republican Congress and the party also holds a clean sweep of the House of Representatives and the Senate.
Financial markets may also have started to digest a moderated outcome. By the end of November 9, the Dow Jones had added 256 points to the previous day’s close, gaining 1.4% and just 0.3% off its August record high, and it went on to close at a record high on November 10.
Monetary policyA shift in domestic policy will probably favour looser monetary policy and bolder fiscal policy. This could provide a strong short-term stimulus to the US economy and may also have spillover effects that bolster global demand.
For South Africa, stronger world economic growth would boost commodity prices, which would aid growth in our economy and strengthen the rand.
Early evidence of domestic policy direction could come in the form of the December Federal Reserve Bank (Fed) interest rate announcement.
Trump favours lower interest rates, which could be positive for the real economy in the near term by sustaining consumer spending and boosting parts of industry. But this would lead to higher consumer price inflation and compromised longer-term growth of the US economy.
Stimulus is also likely to come from fiscal policy in the form of government infrastructure spending. Sectors such as steel, engineering, building and construction are likely to be boosted, but a question mark hangs over the funding plans.
Trump has proposed tax cuts of $3-trillion over 10 years, equivalent to 1.6% of gross domestic product (GDP), leaving the suggested higher spending unfunded.
Not only does this point to a larger budget deficit, it could also bring into question the country’s sovereign credit rating. The proposals on the table would put US government debt on course to exceed 100% of GDP in just a few years, placing the US economy in a precarious fiscal position.
ProtectionismTrump’s protectionist rhetoric about relationships with Mexico and China could also translate into friction with European countries.
South Korea and Japan will also have to step up defence spending, which Trump has threatened to reallocate. This could place stresses on foreign relations among old allies.
There is also potential for a reduction in tensions between the US and Russia under a Trump presidency, which could have some constructive geopolitical outcomes, including a possible ending of the civil war in Syria.
But the obvious negative effects cannot be overlooked.
Uncertainty surrounds existing trade agreements and it remains to be seen which direction Trump will take. Higher tariffs on international trade are a way the Trump government could afford some protection to the domestic economy, especially manufacturing. But this could be negative for global trade and world economic growth.
A move towards greater protectionism could also represent a specific risk for South Africa as a beneficiary of the African Growth and Opportunity Act (Agoa), which has seen the US become one of South Africa’s most important trade partners, comprising $13-billion last year alone. Agoa is believed to have created more than 50 000 South African jobs in the past 15 years in labour-intensive industries.
All of that said, in his victory speech Trump indicated that he would promote co-operation among nations: “While we will always put America’s interests first, we will deal fairly with everyone, all people and all other nations. We will seek common ground, not hostility; partnership, not conflict.”
This last point is perhaps the most critical of all. Borders that have been relatively open to immigrants have been a key factor in promoting US economic growth in modern times. In 1970, the US population comprised 9.6-million immigrants, or 4.7% of the population.
Today, the immigrant population stands at about 45-million people, or 13.3%. Based on the experiences of other countries, putting up walls and ejecting migrants would have a net negative effect on capital flows, skills migration, demographic dividend and job creation, all of which are associated with slower economic growth and falling competitiveness.
TemperamentIn considering market reaction to the shock Trump election, it might be helpful to recall what happened in the aftermath of the United Kingdom’s Brexit vote. After initially recoiling in horror, markets stabilised as the implications were digested.
But Trump has a mercurial nature and, even if a sense of calm returns, as it did after Brexit, there is a resident risk of Trump flare-ups creating greater political uncertainty.
His policies are likely to be marginally negative for the dollar. But the near-term outlook for equities is good as fiscal and monetary policies promoted under Trump will help US consumer spending, infrastructural spending and corporate profitability.
It is important not to lose sight of the fact that this could ultimately translate into higher productivity, improved competitiveness and faster economic growth, which could more than offset the concerns noted about unfunded fiscal spending.
This election result is a reminder that making investments should never be based on predictions, but rather that we should construct our investment portfolios to survive a world of uncertainty and, often, unknowability.
The events since November 8 underscore the permanent importance of a sound investment philosophy and policy, along with the pivotal roles of process, discipline and perspective in investment decision-making.
Dr Adrian Saville is the chief strategist of Citadel — Global Multistrategy Hedge Fund & Asset Management
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