The recent US presidential election has given a clear mandate for Donald Trump to be the next President, and the Republican party has already gained enough seats for a majority in the Senate and the House of Representatives. The control of both chambers of the US Congress has improved the prospects that they can deliver their policy agenda, including tighter border security, tax and spending cuts, and deregulation. How might these policies affect Australian investors over the next 4 years?
In the immediate aftermath of the election outcome, markets reacted with higher Treasury bond yields as traders scaled back expectations for substantial Federal Reserve rate cuts over the coming year. Equities continued their rise, and the US dollar strengthened. These moves were already evident in the lead up to the election in what was termed the “Trump Trade”, as markets started to price in the increasing probability of a Republican victory.
Bond yields rose on inflation fears tied to potential tax cuts, spending reductions, and import tariffs. Equities moved higher as less regulation was seen to benefit the stock market. Jerome Powell said the U.S. election won’t affect near-term Fed policy, easing concerns over market volatility. We don’t guess, speculate and we don’t assume what future government policy choices will be”.
It is important to keep this in mind when considering what impact Trump’s policies may have on Australian investors. Politicians make a lot of promises during an election campaign, but not all promises turn into reality.
Higher U.S. tariffs could slow China’s economy, pressuring Australia and potentially fuelling global inflation.
Any proposed tariff increases that trigger a trade war will push up the price of goods around the world. If the U.S. imposes major tariffs, the RBA may face pressure to raise interest rates further.
US tariffs of 60 percent on Chinese goods would slow the Chinese economy and reduce demand for Australian iron ore that is used to make steel to construct buildings, bridges and other infrastructure. In this case, the price of mining exports, particularly iron ore, would fall as the Chinese economy slows even further.
However, this is a worst-case scenario, and Trump’s proposals may not come to pass. Even with high U.S. tariffs, China could boost spending to offset growth impacts, according to the RBA. Therefore, the overall impact on Australia’s exports from a trade war remains uncertain.
Tariffs have limited impact since the U.S. is only Australia’s fifth-largest goods export market at 4%. Australia’s major trading partners are China (37 percent of total), Japan (15 percent), and South Korea (7 percent). Australia’s biggest exports to the US last financial year were beef, gold and pharmaceutical products.
The Trump Presidency introduces other uncertainties for business, investors and governments, including on climate change policy and global trade. He’s pledged to exit the Paris Agreement again and support fossil fuels over climate action.
A new U.S. administration brings market uncertainty, but economic shifts don’t always predict stock market performance. We know the stock market has been positive in every 4-year Presidential period. This reminds us to stay disciplined in a diversified portfolio that meets your goals.
Dr Steve Garth PhD, M.App.Fin., BSc., BA. is the Principal of Principia Investment Consultants and works with Capital Partners assisting with communications.
For nearly two decades, Steve played a key role in helping grow the Australian arm of a global asset manager. During his career, he managed Australian and global equity portfolios, managed the Asia Pacific trading team and for the last 10 years he managed the firm’s fixed interest strategies.
Steve received his PhD in Applied Mathematics from the Australian National University. He also holds a BSc in Mathematics and Physics, a BA with majors in History and Politics, a Master of Applied Finance.
