Mark Lister, 19 December 2016

Against most predictions, Donald Trump managed to win the US election in November, despite the majority of popular votes going to Hillary Clinton. Below we discuss the possible implications for markets following this historic win.

There are numerous views on how and why he won, but general consensus is that winning the ‘rust belt’ states of Wisconsin, Michigan, Ohio and Pennsylvania got him over the line. Obama won these states in 2012, but this time they responded to Trump’s pledge of bringing the jobs back to the US.

These regions all include former manufacturing hubs, where factories have closed and jobs have disappeared as operations have moved offshore. Trump promised to return jobs to these states, while the Clinton campaign arguably took them for granted and didn’t work hard enough to keep hold of them.

A vote for Trump can be better described as a vote against the status quo. It now seems that many forecasters, economists and politicians have been underestimating the strength of the anti-establishment, anti-globalisation undercurrent that is growing in many parts of the world. The Brexit vote and the Trump win both reflect this.

What does this mean for the New Zealand economy?
This result is 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 our long-term prospects.

While we are not in the immediate firing line for any new tariffs (that prize goes to China and Mexico), the US is still an important trading partner. 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.

The Trans Pacific Partnership Agreement, 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.

It is still unclear how much of the strong Trump rhetoric we heard on the campaign trail will ultimately translate into policy. We have already witnessed a much softer stance from Trump, which is a key reason markets rallied to record highs in the days following the election.

Does anyone win under Trump?
Yes. 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 healthcare sectors. These sectors were all up strongly in the period immediately following the election.

Pro-growth policies, tax reform, increased infrastructure spending, higher interest rates and a strong US dollar also offer clear opportunities for investors.

What should investors do?
There is no need to panic. The US political system is much more than one person. We are generally very comfortable with our positioning and our strategy. Our economy is in exceptionally good shape, which bodes well if we are going into a more volatile period.

Five key implications of a Trump presidency

  1. US companies will benefit at the expense of multinationals. A 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 doing business across borders won’t.
  2. We could see 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 have 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 would swing the balance further away from high-yield investments toward those with a growth tilt, as well as putting upward pressure on interest rates.
  3. 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 be reappointed under Donald Trump, and any new officials could be inclined to increase rates at a faster pace.
  4. 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. The growth could come at the expense of other parts of the world, such as the emerging markets.
  5. 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. As a result, we should see some benefits from a stronger US economy 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 might need to give up on the Trans Pacific Partnership trade deal getting approved.

This article was originally published in the December 2016 issue of News & Views.