Saker Nusseibeh looks at what we might expect from a Trump administration.
As democrats sift through the political rubble following Donald Trump's historic win in the US election, the world's attention has shifted to the impact on markets and long-term political implications of a Trump administration.
2016 has been testing for markets, and not unlike Brexit, we expect markets to shrug off the results of this election after a bout of initial volatility. This is because, firstly, despite Trump's campaign rhetoric, his policy pitches were finely balanced between fiscal expansion and trade protectionism.
Secondly, market fears, we suspect, have been assuaged by an important aspect of American politics: the President's executive power is limited by design, although the Republicans now control both houses. Moreover, 'Super 301' (section 301 of the 1974 Trade Act) hands him the ability to circumvent his own party in the case of trade, should he wish to do so.
Our fear is that consensus might underestimate the damage that Trump could do in the long term.
Our fear is that consensus might underestimate the damage that Trump could do in the long term. For example, governments rely on their reputation as a measure of trustworthiness to reduce their risk premium in capital markets. Given Trump's unusual campaign, it is not a stretch to imagine him repeating his campaign talk of renegotiating US debt.
Although everyone knows such an outcome is highly improbable, a President mentioning the idea might lead to serious volatility in US Treasury markets. Further out, we could see a steepening of the conventional Treasuries curve on a fiscal splurge and feared Federal Reserve interference.
As a positive, Trump is unabashedly pro-business, which could be perceived as a fillip for equities. However, we see a longer-term negative impact on stocks and risk assets, given potential global retaliation to protectionist trade policies.
In the nearer term, large-scale fiscal spending is likely to hit the dollar, and increased inflation will be positive for TIPs. But as we gaze further out, even in recession, closed-economy policies could trigger cost-push stagflation, the wrong kind of inflation.
Trump may also create market volatility through his foreign policy pronouncements. The assumption is that Trump will listen to advice from seasoned advisers when dealing with foreign affairs, but on the campaign trail he demonstrated a clear willingness to dismiss professional advice.
How to lose friends and alienate people
Once again, it would not be a stretch to imagine Trump, in playing to his home constituency, alienating the traditionally supportive Gulf nations with Islamophobic comments. This might in turn strengthen Iran's influence in the region, which could threaten regional stability and see a hike in the oil price.
Likewise, Trump's anti-NATO and pro-Vladimir Putin comments could be taken, if repeated, as a green light by the Russian President to intensify his revanchist foreign policy in Eastern Europe. This could lead to rising risk premia for European assets.
Perhaps most seriously of all is Mr Trump's denial of human-made climate change and the possibility that he may backtrack on COP21 is a huge concern. It could unleash a devastating 'domino effect' where other governments also renege on their promises.
Erasing the North American Free Trade Agreement would strike a serious blow to Mexico, forcing repatriation of two million immigrants. Mexico exports are 35% of GDP, and 80% of those go to the US. With the Peso dropping by nearly 8%, Mexico is very vulnerable to any harsh, ideological inquisition or cessation of trade. The economy was already slowing and these measures would likely send the economy into a serious recession.
In electing Donald Trump, the US has opened a Pandora's Box. As investment managers, we can seek to mitigate risk for schemes and investors, but only time will tell how detrimental the consequences of a Trump Presidency will be.
Saker Nusseibeh is CEO at Hermes Investment Management
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