How a Trump Presidency Could Impact Global Investments

A Look at Mr. Trump's Plans and Their Potential Consequences

Getty Images / John Lund.

Donald Trump’s unexpected victory on November 8, 2016 and his "America First" policies could have a significant impact on the domestic and international financial markets. While the Dow Jones moved more than 700 points lower during election night, the benchmark index moved significantly higher over the ensuing days and most international markets recovered their losses. The new President has already shattered hopes of a Trans-Pacific Trade Partnership and is in the process of renegotiating the North American Free Trade Agreement to be 'less onerous'.

 

In this article, we will take a closer look at Trump’s economic plan and what it means for developed and emerging markets around the world.

Trump’s Economic Plan

Donald Trump rarely provides extensive details of his economic plans — at least at the onset — but he has outlined some broad strokes that provide hints about future policy actions. On his website, Mr. Trump proposes sweeping tax reform along with changes to trade, energy, and regulatory policies.

Mr. Trump’s most likely policy actions include:

  • Cutting Taxes: Business income tax would be lowered to 15 percent; individual tax brackets would be reduced to three; and, the standard deduction would be $30,000 for married couples and $15,000 for individuals. These tax cuts could have a favorable impact on consumer spending by freeing up more discretionary capital over time.
  • Increasing Spending: The ‘Penny Plan’ would reduce non-defense and non-safety spending by 1 percent of the previous year’s total each year, but defense and infrastructure spending would be increased under the program. In March 2017, Trump moved to increase defense spending by 10 percent while cutting State Department and Environmental Protection Agency funding.
  • Reforming Trade: The U.S. would leave the Trans-Pacific Partnership; NAFTA would be renegotiated; and China would be labeled as a ‘currency manipulator’ with cases brought against them in the World Trade Organization. These moves could have a negative effect on long-term growth, but potentially boost short-term domestic manufacturing.
  • Reforming Energy: The U.S. would lift restrictions on all sources of energy — including coal and crude oil — and seek to make the U.S. energy independent. These moves would be a setback for renewable energies through reduced incentives and greater competition, but could help lower energy costs and boost corporate and personal earnings.

The Federal Reserve’s response to these plans will depend on how any fiscal spending boost translates into economic growth, but as of mid-2017, the central bank seems more hawkish than dovish.

At the same time, there’s a risk that a critical Mr. Trump would replace Chairwoman Janet Yellen with someone that would take a different approach. A hawkish central bank could lead the U.S. toward slower growth and less inflation, while a more dovish central bank could lead to greater potential growth and inflation. There are pros and cons to each of these scenarios that investors should carefully weigh.

Economic Risk in Emerging Markets

Latin American markets have the most to lose under a Trump presidency given his intention to pull out of free trade deals and bring manufacturing jobs back to the United States. In pre-election speeches, he threatened to impose a 35 percent tariff on some Mexican-made goods and pledged to close manufacturing plants in Mexico that ‘undercut American workers’.

He also threatened to send undocumented immigrants back to their home countries and make it more difficult for immigrants to join the workforce.

These moves could slow down trade, close foreign manufacturing plants, and reduce foreign direct investment. In addition, remittances from people working illegally in the U.S. are worth 5.6 percent of Guatemala’s GDP, 8 percent of El Salvador’s GDP, and 8 percent of Honduras’ GDP. These critical sources of revenue could dry up if undocumented workers are sent back to their home countries, while these individuals would have to be absorbed into the workplace.

China could also suffer under a Trump presidency. In pre-election speeches, he indicated that China would be labeled as a ‘currency manipulator’ and he would bring cases against the country to the World Trade Organization. He will also consider imposing a 45 percent tariff on Chinese imports into the U.S. to make it easier for American companies to compete. These dynamics could be problematic given that the U.S. accounts for 20 percent of China’s exports.

Political Risk in Developed Markets

The biggest risk to developed countries in Europe is likely political rather than economic. On the heels of the ‘Brexit’ and Trump’s election, the populist tide has been on the rise around the world. The trend towards populism could continue with elections coming up in Germany, France, and the Netherlands, where parties on the far right will be seeking to capitalize on the momentum and embrace nationalism over globalization.

In addition to the political risk factors in place, a Trump presidency could destabilize the Eurozone through more restrictive trade or a higher euro versus dollar valuation. The Trans-Atlantic Trade and Investment Partnership, in particular, appears less likely to complete negotiations. The good news is that the relative calm following Trump’s victory didn’t unnerve sensitive European banks that have been struggling in the months leading up to the election.

The U.K. could also benefit from a Trump presidency. While the U.S. consumes a lot of services from the U.K., Mr. Trump’s policies are largely aimed at protecting the manufacturing sector. Trump has also indicated that the U.K. would be at the front of the line for a new trade deal, which is good news for Theresa May, who many believe will experience difficulties clinching a new trade deal after the region leaves the European Union.

The Bottom Line

Donald Trump’s surprise election introduces a lot of uncertainty into the global markets, but the reaction so far has been largely muted. Like the ‘Brexit’, investors are waiting to see how events actually unfold before reacting to them in a meaningful way.