Mark Lister, 10 November 2016
Somehow, it’s happened. Donald Trump has emerged victorious as the new President of the United States of America. Markets initially reacted with a wave of extreme volatility, although they have calmed significantly overnight. The Dow Jones index experienced massive swings, with futures pointing to an 800-point decline. The NZX50 suffered one of its worst days ever, falling 3.4% during the Wednesday session. However, European markets finished 1.5% higher last night and US shares (which are still trading) are currently up as well. This suggests a much calmer day ahead. The table below outlines the moves since yesterday.
How did this happen?
As ridiculous as it might sound for many New Zealanders, for a significant proportion of America, Trump represents hope. This is much less about an affinity for his world view or his policies, but much more about a negative view on the current establishment. A vote for Trump yesterday can be better described as a vote against the status quo. Many have underestimated the strength of the anti-establishment, anti-globalisation undercurrent that seems to be growing in many parts of the world.
What does this mean for the New Zealand economy?
This result is a potentially a negative one for the New Zealand economy. As a small country dependent on trade, the anti-globalisation rhetoric from the Trump campaign does not bode well for the long term prospects of the New Zealand economy. However, it remains to be seen how any of these potential policies will play out and what the implications could be for us. We are not in the immediate firing line (that prize goes to China and Mexico) for any new tariffs, but the US is still an important trading partner in itself. It is our third largest export market (behind China and Australia), taking 11.7% of our total goods and services. Our key exports to the US are meat, dairy products and wine. It is also an important tourist market for us, with 8.3% of total visitor spending coming from US visitors. Approximately 3.5% of our permanent migrants also come from the US, a number that might rise a little now that Trump has been elected President. The TPPA, which would improve export opportunities for many into the US, now looks to be a long-shot under Trump. There was little in that for the dairy sector anyway, but other industries will be disappointed.
What can we expect from markets over the short term?
Hillary Clinton represented the “business as usual” outcome for financial markets, as opposed to Donald Trump, who symbolises uncertainty, risk and unpredictability. Trump was the wildcard, and markets have little comfort around what they will get with him in control. The element of uncertainty is the key reason we have seen such extreme moves over the past 24 hours. Markets initially reacted to this in a very similar manner to the Brexit news, with risk assets (including shares, commodities and higher-risk currencies like the NZ dollar) falling sharply, and safe haven assets (high quality bonds, the Japanese Yen and gold) rising. In the lead up to the US election, our best guess was that a Trump win could see global shares down 5-10% in the immediate aftermath. However, the S&P500 is actually up overnight, as are US bond yields. While things will likely remain volatile, reactions could be more subdued than many have expected.
Were markets overreacting to this news yesterday?
Quite possibly, yes. In the eyes of many, Donald Trump is a moron. However, his success is simply a mirror image of the division and unhappiness that is prevalent in the United States (and many other parts of the world) at the moment. We don’t have a clear view of what his policies will look like just yet, but they may well be much more benign than is expected. Many of his policies are pro-growth, which could be a positive for the US economy and for equities. Trump has a thin majority in the Senate and a reasonable Majority in the House, although anything too outlandish could be voted down by members of his own party in those two levels of Congress. That could keep him in check much more than people expect.
Can we learn anything from Brexit?
The initial Brexit reaction was very similar to what we saw yesterday, with the US markets falling 5.3% during the two days following the UK vote. However, the knee jerk reaction passed quickly with shares rallying more than 9% over the following weeks. The fickle financial markets could move on to the next thing reasonably quickly, and there are still a couple of hurdles to come this year. Most notably, these include the Italian constitutional referendum (December 4), the European Central Bank meeting (December 8) and the Federal Reserve meeting (December 13/14).
Does anyone win under Trump?
Absolutely. Many of his policies are strongly positive for US economic growth, even if some of them could come at the expense of some other parts of the world. Domestically focussed US companies could do very well under Trump, most notably the financials, energy and biotech sectors. Pro-growth policies, tax reform, increased infrastructure spending, higher interest rates and a strong US dollar offer clear opportunities for investors.
Where to from here?
There is no need to panic. The US political system is much more than one person. There is every chance markets have initially overreacted to a Trump win, and that when the dust settles, it might be a more benign outcome than many believe. New Zealand is likely to be somewhat insulated, and our economy is in exceptionally good shape, which bodes well if we are going into a more volatile period.