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.
In essence, bond yields moved higher on inflation concerns due to the prospect of lower taxes, spending cuts and tariffs on imports. Equities moved higher as less regulation was seen to benefit the stock market. However, these sudden moves should be seen in the light of comments from Jerome Powell, the Chair of the Federal Reserve, who said in a press conference following the Fed meeting the day after the election: “In the near term the election will have no effects on our policy decisions. 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.
Having said that, most Australian economists are forecasting that any increase in tariffs is likely to put pressure on Australia’s economy through a slowdown in China. Also, tax cuts and reduced immigration would likely result in larger US budget deficits that could stoke US inflation, which in turn may curb global economic growth.
Any proposed tariff increases that trigger a trade war will push up the price of goods around the world. In particular, if the US imposes a 60 percent tariff on imports from China and duties of 10 to 20 percent on other countries, the Reserve Bank of Australia will face pressure to deliver further interest rate rises.
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 if the US introduces such a high tariff, China could unleash further spending stimulus to offset any hit to growth, according to the RBA. Therefore, the overall impact on Australia’s exports from a trade war remains uncertain.
In terms of any direct effect that tariffs on Australian goods would have, the United States is only Australia’s fifth-largest destination for goods exports and is just 4 percent of total exports. 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 has vowed to again withdraw the US from the United Nations Paris Agreement on climate change and back fossil fuels.
While the change of Administration in the US will bring some uncertainty to financial markets, it is important to realise that the economy is not the stock market. While some of the suggested policies will have economic consequences, it is not clear how that translates into 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.
