The election of Donald Trump has surprised and shocked most of the world public opinion. Since the 9 November commentators and media have continued the unproductive and unprofessional work, done since the billionaire decided to run for the Republican investiture. Any commentary, any action is analyzed through an assumption of negativity. Trump seems to have a perverse effect on journalists: they lose their objectivity.
The political context
The campaign has been controversial, populist, poor in term of ideas and often below the belt. Despite the victory in the Congress, the Republican party is devastated and divided. In one side, the establishment, – most of the leaders did not vote for Trump -, will be critical to any measures as tax reforms or renegotiation of international agreements. If Trump has endorsed an anti-globalisation rhetoric, the Republican party remains deeply attached to the neo-liberalism initiated by Ronald Reagan in the 80s. On the right side of the party, leaders from “the tea party” hate Donald Trump. They are going to make his life complicated as much they can.
In the Democrat party, the hangover is still heavy, and it will take months before they will be able to show a united front. The movement to the right center initiated by Bill Clinton in the 90s is going to be severely challenged by the left side, and the “Sanders revolution” is probably not finished.
The Trump program
In such political mess, can the new controversial President govern the country and implement his program?
First, we need more clarity about what is going to be his priorities. We do not have so many details about his plan as Donald Trump reacts more instinctively than according to a particular agenda.
Economically, the budgetary policy is going to be the weapons of the new administration. Paradoxically, Keynes is going to be back in the shoes of a Republican President. A policy of new investment in infrastructures is going to be implemented. How is this going to be financed: public investment or taxes stimulus for the private sectors? Can the US economy afford such programs which by essence needs to be large to impact a country?
What kind of relations is the US going to have with the rest of the world? The relationship with China, the second biggest world economy is crucial for the US and the rest of the world. Does the new administration want to implement new import taxes on Chinese good and services as mentioned during the campaign?
Does he want to renegotiate some international agreement like the deal with Iran or the CAFTA?
What relation with the natural allies of the US: the Europe?
The relation with the middle-east and particularly Saudi Arabia has to be redefined, and some of these commentaries brought controversies. His threat to bar Muslims from the US reverberated around the Arab world.
The economic risks
We need definitively more details about the agenda of the new President. However, from what we know, few risks can be identified.
1. An increase in the current account deficit fragilizing the Dollar. Indeed, the first market reaction to the Trump victory has been an increase of the Dollar. However, a lot of factors could push the value of the USD down in the coming year. First, the new administration will pump money into infrastructure investment and other expansionary fiscal policies. Second, the fundamental picture did not change, and regarding the economic cycle, the FED will have little room to increase the interest rates.
2. A “Chinese scenario”. The new administration plans taxes stimulus to push companies to invest in new infrastructures and projects. Such situation could drive to the same position than China in 2009, where huge incentives built extra capacities of production and have brought the corporate debt to 184% to GDP. The companies in the SPA 500 have an estimated USD 1.5 trillion in their balance sheets. An investment is made comparing the return on investment versus average price of capital. In such low-interest rate environment, the risk of a bull is real.
Which impact on the investment policy?
Donald Trump is not going to change the big picture dramatically. The Trump’s election is a surprise, and regarding the sulfurous personage, it brings more uncertainties translating in the markets by higher volatility. This increase of volatility is not going to stop anytime soon as we will not have more clarity in the coming weeks.
Two factors complicate the situation:
1. A miss of preparation of the Trump team; according to the Wall Street Journal, the New President was surprised to hear last week that it would have to replace everyone or 4000 people in the West Wing. The Trump team doesn’t have anything like 4,000 qualified loyalists ready to walk into executive branch jobs;
2. An absence of majority sustaining the New President.
Even if the new Administration can implement some “Keynesian plan”, it will take months before to see any impact on the real economy. The increase of the US equity markets on the back of this idea is highly exaggerated and fragile. Fundamentally, it ‘s hard to justify the current valuation. In term of macroeconomic picture, the situation remains precarious. The increase in GDP in Q3 was due in large part to the positive impact of inventories and exports. The last Non-Farm Payrolls was below expectations and none the reflection of a booming economy. Likely, the FED will increase interest rate in December, but 2017 could be as 2015 and 2016 in term of interest rates hikes: one or two expected.
Probably the influx of money which left emerging markets on the fixed income and equity markets would be back in the first part of the year and likely increased.
Despite the Trump election, emerging markets remain attractive. Fundamentally, current account deficits have been reduced, currencies have stabilized, and significant economies such as Brazil and Russia are coming back after two years in deep recession. Fears of a sudden slowdown in the Chinese economy, which overshadowed the asset class at the start of this year, have faded. In term of valuation, some significant opportunities will appear in the coming weeks. Another factor would play for emerging market: an increase in commodity prices.
Donald Trump will not make any revolution. The nomination of the Republican Party Chairman Reince Priebus as his new chief of staff demonstrates his pragmatism. He is unprepared for the challenge; he has a different style of communication than Barak Obama, but before making any conclusion, we need to wait and see.