Donald Trump(s) Clinton

10 Nov 2016

By Shadforth Financial Group

Pollsters were unable to redeem themselves from their Brexit failings with another incorrect prediction. Donald Trump defeated Hillary Clinton in the race for the US Presidency having managed to exceed the 270 electoral votes required. The nation remains divided with Clinton claiming 47.7 per cent and Trump a marginally lower 47.5 per cent of the popular vote – the second time in five elections the winner of the popular vote has lost the electoral college vote.

Several key states in America’s ‘rust belt’ voted for Trump when they were expected to support Clinton. The common theme in those states is that manufacturing jobs have been lost and there is a feeling that the US has become a weaker and less prosperous nation. Trump’s key slogan of ‘make America great again’ resonated strongly in such areas, especially amongst white non-college educated males.

Republicans control the Senate and House of Representatives

The composition of Congress is as important, if not more important than who sits in the White House. The United States Congress consists of the Senate and the House of Representatives, both of which retain a Republican majority following the 2016 US election.

Republican’s won the 51 seats needed to secure the majority in the Senate, as well as the 218 seats needed to claim majority in the House of Representatives. This is important because many of Trump’s plans need to be approved by Congress, and, with the Republicans retaining majority, there is a greater probability that these will be passed. However, with an aggressive election campaign that seemed to pitch Donald Trump against his own party as much as the Democrats, there is still the likelihood that many of his proposals – such as Congressional term limits – will need to be watered down.

While there is less chance of gridlock in Washington with a Trump presidency, his plans for major taxation and spending changes will likely see debt increase sharply and would need Congressional approval. At face value, Trump’s proposed policies would provide a boost to Gross Domestic Product growth but we don’t expect them to pass in their current form.

How will investments be affected?

As the election results flowed in and investors realised Trump was likely to win, share markets initially fell sharply.  This negative reaction was short-lived and changed to a positive reaction after Trump delivered a victory speech in which he praised Hillary Clinton and vowed to work collaboratively with other countries.

Should Trump be able to pursue his initial policies on trade, his protectionist stance will likely impact multinational US companies negatively, and as a result depress share prices in the US. Australian listed companies with greater exposure to the US and China would likely be affected due to Trump’s stance on global trade and his views on China.

The longer term impact on financial markets is more difficult to predict but historically markets have performed well irrespective of the election result. Whether or not share market performance can be sustained in the longer term will be partly dependent on whether Trump moderates his policies and manages to get them approved in Congress.

How will Australia be affected?

Any increase in import tariffs are more likely to be directed at China and Mexico who contribute 35 per cent to all US imports, whereas Australia only contributes 0.5 per cent. Additionally, only six per cent of Australian exports in 2015 were sent to the US so any impact to Australia-US trade will have a minimal impact on the Australian economy.

There is concern that any impact on China will flow through to Australian exports but it is important to note that Chinese exports to the US are less than three per cent of China’s Gross Domestic Product. It’s unlikely that tariffs imposed on China will have a significant effect as China can weaken its currency to support their export industry. Australia is also protected by the free trade agreement implemented in 2005 which eliminated most tariffs for exported products from Australia to the US. In terms of Australia-US trade, a Trump victory is more about lost opportunity from the Trans-Pacific Partnership rather than a negative impact on current trading arrangements.

The Trump Presidency will increase political risk around the world, particularly in the already fragile Euro area. France, Germany and the Netherlands are holding general elections in 2017 which could see a move towards protectionist and right wing parties. The Trump victory is likely to add even more uncertainty in a global political environment that appears to be moving away from establishment parties.

Investment markets, while often highly volatile and skittish in the short term, are ultimately driven by fundamentals rather than who sits in the White House. While the Presidential election is an important political event, you should remain focused on your own financial objectives and situation. This can be achieved by ensuring your portfolio is well-diversified so it can weather investment market reactions to political uncertainty.

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