Trump wins the US presidential election
After months of wrangling between Donald Trump and Hillary Clinton, Trump has emerged the victor of the US presidential election.
The election is finally over and Donald Trump will be moving into the White House in January 2017, but what impact will his win have on markets and the economy?
Even in the final days before the US hit the voting booths, many pundits anticipated a Clinton win.
Had that been the outcome, it was expected that markets would rally, as a Clinton presidency would have been widely viewed as a continuation of the status quo.
While both candidates had advocated a renewed look at protectionism, Trump’s proposals have been widely viewed as the more extreme.
It remains to be seen whether his hard-line policies could seriously rattle markets for some time to come.
Trump’s plan for the US economy
If Trump’s proposed plans to roll out new trade tariffs become a reality, this could be bad news for US equities going forward, as a high level of protectionism is likely to inhibit productivity growth.
Trump has already spoken about how he would like to raise tariffs on Chinese and Mexican goods to protect US jobs. He has also threatened to tear-up NAFTA, the free trade deal between the US, Canada and Mexico1.
In addition, he has infamously declared he would make Mexico pay for a border wall between it and the US2.
While he advocates greater infrastructure spending, he is also backing significant tax cuts. However, it is feared that any substantial curtailing of tax receipts could drive inflation up sharply, which in turn would be likely to lead to higher interest rates. In such a scenario, the strongest negative reaction would most likely be felt in emerging market assets, given that most developing nations companies generally borrow in US dollars, so an increase in the value of the greenback means a greater debt burden for these countries.
Of course, despite the uncertainty surrounding his tenure, the big question is whether he would get any of policies passed by Congress. The President’s powers are checked by the legislative and judicial branches of the Federal government. Many major changes that Trump may want to make would need the backing of both houses of Congress, which is comprised of the House of Representatives and the Senate. Trump could accomplish some major changes through the executive powers of the president to implement and enforce existing laws (including repealing existing executive orders signed by President Obama that regulate numerous sectors of the economy).
The President is Commander in Chief of the armed forces. Although this power doesn’t extend to raising additional budget for the military and long-term military action is subject to Congressional approval under the War Powers Act, Trump has pledged to boost military spending by tens of billions of dollars, increasing the number of fighter planes, active troops and Navy ships3.
Investing in US shares
Given Trump’s victory, the consensus view is that there is now a greater amount of market risk to contend with.
Despite Trump’s win causing a market wobble, investing should always be viewed as a long-term undertaking. Selling out now will only crystallise any losses you have already suffered and if markets eventually recover, you could miss out on potential gains; although as with any scenario, a market recovery cannot be guaranteed.
Of course, you need to bear in mind that investing in US shares, as with any overseas investments, involves currency risk.
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