Mark Lister, 17 October 2016

The US Presidential debates between Hillary Clinton and Donald Trump have highlighted some significant differences between the two candidates. They also reflect very strong interest in this election, with the first debate being the most watched ever, breaking the previous record set in 1980 (between Jimmy Carter and Ronald Reagan).

Hillary Clinton has maintained her lead, but with plenty more campaign theatrics to come over the next few weeks, we shouldn’t underestimate Trump’s chances. The anti-establishment undercurrent that would rather take a risk on Trump than continue under the status quo is strong.

If he does pull it off, there are a few things financial markets and investors can expect.

Higher US interest rates. Donald Trump is not a big fan of the Federal Reserve, Chair Janet Yellen or her deputy, Stanley Fischer. He thinks the Fed is acting somewhat irresponsibly (and politically) by keeping interest rates as low as they are. Yellen and Fischer might not last long under Donald Trump, and new appointments could be inclined to increase rates at a faster pace.

Growth in America could actually improve. Trump wants to cut taxes, and increase spending on defence and infrastructure. This fiscal stimulus would likely increase US economic growth, in the short-term at least. This would come at the expense of other parts of the world, such as China and the emerging markets.

A stronger US dollar. The combination of higher interest rates, as well as stronger economic growth would likely see the US dollar rally against most other currencies, including ours. The US is our fourth largest export market, taking 11.7 per cent of our goods and services. As a result, we should see benefits from a stronger America and a rising US dollar. We’re not likely to be in the firing line for Trump’s anti-trade policies as much as others, but we can probably give up on the TPP getting approved.

US companies will benefit, at the expense of multinationals. The key aspect of the Trump agenda is protectionism, which is the opposite of globalisation and free trade. He wants to bring manufacturing back to the US, impose hefty tariffs on Chinese and Mexican imports, and become much more insulated from the rest of the world. US companies with mainly domestic customers will benefit from that, but multinationals won’t.

We could see an inflation start to increase. Globalisation has been a key driver of deflationary pressure in recent decades, as low cost producers and extra capacity in places like China has pushed prices lower. If Trump gets the ball rolling for the rest of the anti-globalisation movement, we could see some of those trends reverse. A surprise inflationary spike could swing the balance away from high-yield investments toward those with a growth tilt, and add to upward pressure on interest rates.

Expect a sell-off, then maybe a recovery. Markets would react the same way they did to Brexit. Shares would fall, higher risk currencies would be sold off and safe-haven assets like gold would rise. However, before too long we could easily see a rebound as some policies are interpreted as being better for growth, and if it became clear the checks and balances in Congress would keep him from doing anything too outlandish.