With less than a month to go until the US presidential election, the polls continue to ebb and flow. Some show Americans rate Donald Trump at least equal to Hillary Clinton in terms of the ability to manage the US economy.
But while a Clinton win will be closer to business as usual, a Trump victory will likely cause significant changes that will have more implications for investors. Here I will highlight the key differences between each candidate’s specific policies.
Aside from the fluctuations in the polls, this election brings an unusual level of uncertainty. For the first time in history, it presents a true political outsider as a major party candidate. Indeed, Trump has no track record as a politician. It is also difficult to assess how his campaign slogans and speeches would translate into actual policies.
In general, however, his populist slant and protectionist comments suggest an approach that will not be beneficial for globalisation and could particularly hurt global trade.
For example, his objections against trade agreements form part of a wave of similar sentiments globally, which, in turn, have led to a growing number of protectionist measures like trade barriers, import duties and state aid (including bail-outs).
Such measures negatively impact global trade. In a recent report, the World Trade Organization warned against the “knock-on effects for economic growth and job creation” of this rise in restrictions.
This has implications, in particular for the US dollar. Data plotting poll readings against the trade-weighted US dollar suggests Trump is good for the currency.
But apart from the fact the correlation is very low once you actually calculate it, this relationship says nothing about the events that could occur following a Trump election. We judge the current dynamics to be driven more by sentiment (i.e. a flight to safety in uncertain times) and that in the event of a Trump win the fundamentals, namely a likely decline in global trade and thus lower demand for the dollar, would take over.
As far as the US economy more broadly is concerned, Trump himself has a dim view of its current state. He believes “we are in a bubble” and that after this pops the US may be heading for a recession.
At the same time, he has also expressed confidence that he can fix it. An area where he has hinted at increased government spending to support a structural recovery is in infrastructure. Based on his comments so far we can expect additional initiatives on the following:
- Renegotiations or even cancellations of trade agreements; for example, the North American Free Trade Agreement. This would likely lead to higher import tariffs and quotas, and could benefit domestic manufacturing.
- A review of taxes; for example, an overhaul of the complex US tax system with potential implications for the cash holdings US companies have abroad. Should the latter be repatriated, we believe this would benefit capex spending in the US.
- A challenge and possible repeal of ObamaCare. This would selectively benefit healthcare companies, both Health Maintenance Organisations and pharmaceutical firms.
- A challenge and possible repeal of climate change and other environmental policies. This would hurt the renewable energy industries and benefit the carbon energy ones.
- Foreign policy will become more constrained and less ambitious as far as “Pax Americana” is concerned. This will have implications for Nato and Obama’s “pivot to Asia”, among others. Overall, also in light of broader global developments, the defence industries should benefit.
- Full immigration and border control, with the infamous proposal for a wall between the US and Mexico exemplifying how far he would go. Some estimates indicate that fully enforcing even current immigration law would cost approximately $500bn and would shrink the labour force by 11 million and GDP by $1.6trn. As an aside, this would obviously discriminate against foreign workers and could lead to higher average wages.
This list is not exhaustive and there are more areas where a Trump win will have a significant impact. For example, another important question is how the large US deficit will be funded, not only in light of increased infrastructure spending but also in light of the potential retreat of foreign investors who reassess the attractiveness of the market under an isolationist president.
Unlike Trump, Clinton has been a politician for a number of years and was Foreign Secretary during Obama’s first term. She is also more liberal. This particularly applies to areas such as gun ownership, crime, abortion and same-sex marriage.
In terms of economic policies, the following issues are examples where Clinton differs from Trump:
- Supports state intervention, including tighter regulations on certain industries (e.g. healthcare).
- Supports higher taxes on wealthy.
- Supports considering citizenship for illegal immigrants.
- Supports keeping social security public.
However, Clinton has also been critical of trade agreements, so their difference on this particular topic is relatively small. Nevertheless, the overall consensus expectation is that her election will mean business as usual on most policies.
Currently, and in line with the polls, markets are discounting a Clinton win. Predicting in more detail how they would react to a Trump victory is incredibly difficult, if only because political events belong to the space of uncertainty rather than risk.
Current moves in prices could be nothing more than buying the rumour and selling the fact. They could stop or even reverse if Trump is elected. Still, should he win, any initial reaction is expected to be negative for risk assets, such as equities, due to the initial uncertainty involved.
Crucial will also be any (in)action by the Federal Reserve, as well as Trump’s initial comments on these. He has been very critical of the Fed, which he holds responsible for the aforementioned “bubble” and any hint of threatening its independence would be taken badly by the markets. What is more, Fed chair Janet Yellen may decide to resign even though her term does not end until February 2018.
Patrick Schotanus is multi-asset investment strategist at Kames Capital