Donald Trump is elected President of the US (again). What are the implications for investors and Australia?

Counting is continuing but Trump looks to have secured at least 270 of the 538 electoral college votes and won the popular vote. The Republicans are also on track to regain control of the Senate and, although it's close, looks like retaining the House, resulting in a Red Sweep. Trump’s victory portends a ramping up of trade wars and increased economic policy uncertainty with the high risk of weakening US institutions, democracy and global alliances.

Trump’s key policies

Trade: Trump is threatening a big ramp-up in protectionism with a 10-20% tariff on all goods imports and a 50-60% tariff on goods from China. This would take the average US tariff rate on imports from around 2.5% to at least around 17%, a level last seen in the 1930s, and it was a disaster then!

Fed independence: Trump would seek to replace Jerome Powell, and his supporters are looking at ways to roll back the Fed’s independence.

Regulation: Trump is likely to slash energy and financial regulation.

Key implications, risks and uncertainties

Working partly the other way though he is still likely to regard the share market as a barometer of his success and would prefer to see it go up. So this may provide a partial constraint on him.

The latter may be the case, but we could go through a lot of disruption as Trump initially ramps up the pressure, resulting in a much bigger impact on share markets than seen in 2018 (where Trump’s trade wars contributed to an almost 20% fall in shares). 

This time around, the proposed tariffs are much bigger (see the above first chart) and he only backed away in 2019 out of a desire to get re-elected which is not an issue this time around. In any case, Trump has long been a protectionist suggesting his tariff threats may be an end in themselves. And tariff hikes this time around will likely be made worse as impacted countries hike tariffs on US imports in retaliation (with reports Europe is planning to hit back quickly). The net impact will be a further reversal in global trade and globalisation.

Fourth, the US is likely to become more polarised, including around how to deal with economic challenges – this was a feature of Trump’s first term and arguably continued under Biden (albeit more mildly). Trump is likely to treat his win as a vindication of his policies and may double down. This could make it harder for the US to reach compromises to solve economic challenges and lead to increased social unrest threatening US democracy.

Finally, the sequencing of policies may have a big impact on investment markets – if he focuses initially on tax cuts and deregulation then US (and hence global) shares could rally further in response as we saw in 2017. But if he goes early and hard on tariffs then any near-term rally in shares could be brief. His inability to have a third term suggests a high risk of the latter.

Specific economic impact of Trump’s victory

His policies on tax cuts and deregulation could help boost the supply side of the US economy via increased investment in the US resulting in a boost to productivity. However, on balance Trump’s policies – with higher tariffs resulting in higher import prices and less competition (which is bad for productivity), deportation and lower immigration resulting in lower labour force growth (which will lower potential economic growth) and potential moves to weaken the Fed’s credibility – risk adding to inflation and being negative for US growth. His trade policies with a likely global trade war would be negative for global growth.

Likely investment market implications

• upwards pressure on US bond yields - via a bigger budget deficit and higher inflation and fewer rate cuts from the Fed;
• upwards pressure on the value of the US Dollar – via higher tariffs, higher than otherwise Fed interest rates and increased global uncertainty;
• Upwards pressure on Bitcoin and other cryptos as Trump is seen as more favourable towards crypto;
• Ambiguity for the US share market with tax cuts and deregulation being positive (driving a short-term boost), but trade wars and higher bond yields being negative (on a cyclical view);
• US shares outperforming global shares reflecting the tariffs and increased global uncertainty;
• Upwards pressure on US financial and energy shares (less regulation) relative to clean energy shares (as climate measures are reversed);
• Upwards pressure on US small caps relative to large caps including tech stocks (as small caps will benefit most from the lower corporate tax rate on domestic profits and large caps are vulnerable to a trade war).

This time around, shares are already expensive so the upside may be more limited. That said shares may still see further post-election gains on relief that it’s out of the way and hope that he focuses more on tax cuts and deregulation, but this could be reversed if he starts focussing on tariffs and as higher bond yields are bad news for shares.

Australia is vulnerable to a new Trump trade war

An OECD study showed that Australia could suffer a 1.2% reduction in GDP as a result of a 10% reduction in global trade between major countries. Resources shares would be most at risk and the Australian Dollar would likely fall (and we have already seen a bit of that). Of course, similar fears existed during the last Trump trade war, and it didn’t turn out so bad (although the Australian Dollar fell 10% in 2018 with US tariff hikes and Fed rate hikes).

There is also the risk that if Trump’s policies boost US inflation there could be a global flow on, including to Australia, resulting in higher than otherwise RBA interest rates. This is a risk, but I suspect it would be offset by the growth-dampening impact of an intensified global trade war.

Concluding comment