Thursday, November 10, 2016 5:37 PM / Cordros Capital
In what was a stunning victory in the race for the White House following yesterday's election, Republican Donald Trump defeated the widely expected-to-win (according to polls leading to the election) Hillary Clinton to halt America's eight years of democrat-led government.
"It will be BREXIT-plus-plus-plus", said Trump during his successful presidential campaign. There are overwhelming parallels between the two. Unlike Brexit however, the impact of Trump's victory on markets was short-lived, primarily driven by the assuaging acceptance speech – wherein Trump applauded his opponent and called for a United America – which broadly speaks of his statesmanlike personality, rather than the controversial opposite that dominated his campaign journey to the election.
While the markets' sharp recovery somewhat depicts the lessons investors learnt from Brexit, concern is that it adds to the raging uncertainty on what type of President Trump will be.
The overall outcome of the election heightens risk in what was already a fragile global political environment. Grey areas border on (1) Trump's political inexperience and (2) whether his threats to build border walls and start a global trade war are mere campaign slogans.
While the analysis of the longer term impact of Trump's victory on markets and global growth may not be a walk in the park at this early point, we draw some takeaways from his planned policies, majorly on trade and taxation.
Global growth outlook remains weak, as oil prices remain low and China and the U.S grapple with weaker-than-expected growth. In particular, the IMF, in its October 2016 World Economic Outlook, had further cut its global growth forecasts for 2016 and 2017 by 10bps to 3.1% and 3.4%, respectively, from 3.2% and 3.5% (in its April forecast).
The fund specifically cited the Brexit vote and the U.S. presidential election campaign as particular threats to global outlook given their protectionist policy approaches.
If Trump's campaign threats (e.g. border walls and global trade war – specifically heavy tariffs on Chinese products) are anything to go by, his victory creates additional downside risks for the Chinese economy, whose goods are already becoming less competitive amid rising labour costs.
While Trump's acceptance speech came in a more conciliatory manner – hinting that his government will deal "fairly" with everyone – China's initial reluctance to congratulate the president-elect spells dissatisfaction. Thus, we sense a further drag on global growth.
There is a high likelihood of Trump's policies (e.g. planned tax cut of about $6 trillion) widening the U.S. fiscal deficit and accelerating inflation, thus strengthening the case for a Fed rate hike.
This may further depress foreign portfolio investments into Nigeria and elevate the pressure facing the LCY. What Trump thinks about the FOMC however remains to be seen (Trump's economic advisers had accused Janet Yellen of creating a "false economy" by keeping interest rates artificially low to help President Obama and his Democratic opponent Hillary Clinton).
While oil price also bounced back alongside risky assets, Trump's win now calls for less optimism on OPEC's recent output freeze deal, given his pledge to open all federal land and waters for fossil fuel exploration. Supportive factor for prices, however, is the possibility of the U.S revisiting its stance on Iran.