By Mihir Kapadia, CEO of Sun Global Investments
In November 2016, for most observers, a Donald Trump win was a slightly worrying possibility and a Hillary Clinton victory seemed to be the best route for economic continuity and stability. But then the unexpected happened; Trump won the Presidential Election and the market rallied strongly from the next morning onwards.
This optimism continued as Trump’s inauguration approached, with markets anticipating the sweeping economic reforms promised by his campaign. In the market, this was christened the ‘Trump Trade’, and over half a year since President Trump took office, some of the optimism seems to be showing signs of fading.
Markets were apprehensive mainly because Trump seemed to be an unknown political factor and a threat to the established order. Some people feared a similar panic to the one that swept global markets in the aftermath of the BREXIT vote.
However, with hindsight, Trump’s ascent represented a great investment opportunity for investors. His economic policies emphasised large scale infrastructure investment, significant reforms and a large stimulus which is likely in aggregate to be positive for economic growth and activity.
Trump exhibited a more conciliatory tone towards Janet Yellen and the Federal Reserve, compared with the more hostile rhetoric of the campaign. This emphasised continuity and stability and reassured the markets further.
The dollar surged to new heights and the situation seemed promising for investors who had hoped to see progress in the US economy by an administration that would not be mired in a political stalemate. Trump achieved a Republican majority in both houses, a fact which in theory increased his chances of pushing through his legislative agenda. Compared with the Obama administration which often faced a hostile and partisan Congress, the Trump administration seemed to represent a more decisive direction for the US economy with pro-growth policies and promises of tax cuts and deregulation.
These factors ensured some progress for the US dollar and for US assets. However, some more troubling questions have arisen about the administration in more recent days. It has been argued that campaign promises have not materialised, and in some cases, such as the President’s tough stance on China, these seem to have reversed altogether. In addition, the numerous scandals and controversy to have hit the White House since January have led to questions as to whether the Trump administration will be competent enough to deliver on their economic agenda.
One key event was the release of US first quarter GDP figures that showed the slowest growth in years. Although it is still early days for the Trump administration, it was viewed by some as indicating the failure of the Trump administration to boost the economy. On this view, despite the promises of tax reform and infrastructure investment, few if any of Trump’s economic policies seem no closer to fruition than they did before the election. It is this which seems to have cooled investor optimism. However, this is not the complete picture - while the US dollar has declined in 2017, US Stocks (especially the NASDAQ) have powered away and are at new all-time highs at the time of writing.
During the campaign Trump criticised the Fed for its policy of keeping interest rates low. Whilst Trump’s opinion on interest rates has varied, he has argued for a lower dollar which many see to be somewhat inconsistent with lower interest rates. Whilst the Fed has raised interest rates once this year, with officials indicating that two or three more interest rate increases were on the way, recent events have seen interest rates on hold and the likelihood of more rises this year is again under question.
Many controversies have pervaded Trump’s time in office; this did not seem to affect markets much until a flare-up of the James Comey – FBI issue which eventually rattled the stock markets and the US dollar. This soon evolved into a larger ongoing investigation into the administration’s links with Russia.
Foreign policy has also proven fraught with uncertainty, with the latest economic sanctions on Russia straining relations with the allies in the EU. Both US and European businesses have expressed concerns over the prospect of being penalised by the very same sanctions aimed at punishing Russia, due to the amount of partnerships and contributions involved. For investors, some of the allure of Trump during his time in office would appear to have faded for the time being.
However, Trump’s time in office has seen a very different story unfold within emerging markets, with its biggest loser being Mexico. The key effect was Trump’s controversial policy for a border wall between USA and Mexico for tackling illegal immigration.
Upon Trump’s victory the Mexican Peso crashed to record lows, with more details of the President’s plan hurting the emerging market’s economy – and relations with the US, further. The threat to use remittances as a tool to fund the wall, amongst other ideas, also served to threaten other Central American economies.
However over half a year since Trump’s inauguration the markets tell a very different story. The Mexican peso has become one of the world’s best performing emerging market currencies, rallying to a 14-month high since January after Trump took office. After the volatility seen at the beginning of the year, the peso has seen far more positive movement over the first seven months of Trump’s presidency. This positive sentiment has boosted other risky assets including Emerging Market Assets.
In conclusion, the Trump Presidency presented an opportunity for a resurgent US economy with comparisons made early with President Reagan’s time in office. Half a year later, Trump’s presidency has proven to be tumultuous, subverting expectations for some and confirming them for others. Although US stocks and emerging markets have gained strength, global risks for investors have also risen under the turbulent Trump administration. If this is taken as a sign of things to come, it is likely that investors will see more volatility over the next 4 years.
According to Forbes, voters concerned about immigration helped swing both the Brexit vote and the election of Donald Trump to the winning ends, but this goes beyond the UK and US’ big socio-political decisions. In many countries now workers are putting pressure on lawmakers to oppose the perceived threat of immigration.
This in turn allegedly affects regional and sector markets and the global economy a great deal. This week Finance Monthly heard from several specialist sources on the various ways immigration changes and public opinion on immigration are or aren’t shaping local and global economies.
Tijen Ahmet, Immigration Specialist, Shakespeare Martineau:
Positive news about migrant workers is often overlooked. As immigration is regularly at the forefront of news and political debate, migrants - whether filling highly-skilled or low skilled jobs - often bring benefits to their host country that directly impact on global business.
The invaluable knowledge and talent from the highly skilled, and the filling of key occupations by the low skilled, can decrease unemployment and increase income capacity with no negative influence on public finances. Most significantly, migrants allow businesses to expand their workforce to meet their growth potential.
UK corporates across the retail, IT and financial services sectors in particular, are beginning to seek their migrant workforce from new markets that they would not have ordinarily considered, forming alternative relationships with fresh customer markets.
There is an assumption that all migrant workers are low skilled and this just isn’t the case. Migrants from a global arena not only fill talent deficits in the host labour market, but can also offer a diverse skillset that may be lacking in the host country. Such skills can generate more cross-border new business opportunities by opening communication up to new markets, while knowledge transfer can assist in upskilling existing co-workers.
Due to restrictions of free movement between the UK and EU global businesses have the opportunity to select the most suited candidate from a much wider pool of talent by casting the net more widely.
With Brexit negotiations unfolding, it is likely that immigration laws will continue to change frequently and directly impact global businesses as a result. Such quick changes to immigration laws, such as those revealed in the Queen’s Speech can cause significant instability in currency markets, causing drastic fluctuations.
Although businesses with bigger profit margins are less sensitive to currency fluctuations, increased exchange rate volatility combined with the complex structures of most global businesses, means that monitoring trading activity is now essential, no matter the size or scale of the business.
The UK’s decision to exit the EU, where immigration was a commonly considered factor for the leave campaign, provided a strong example of fluctuating currency rates. For example, immediately after the Brexit vote there was a sharp drop leaving GBP to EUR 15% lower than pre-Brexit and GBP to USD and AUD down 17%, having a significant direct financial impact on global business.
Guilherme Azevedo, Associate Professor in Business & Society, Audencia Business School:
In December 2015, Prime Minister Justin Trudeau went to Toronto’s airport to receive Syrian refugee families. When handing them winter coats, he repeated many times: “Welcome. You’re safe at home now”. Refugees to Canada arrive as permanent residents and receive support to become full-fledged citizens as swiftly and smoothly as possible. The families are sponsored by local communities, bodies of government, churches, and individuals who provide them with money and housing for one year. Many of them become economically autonomous and start to give back to society before that year is over.
Trudeau’s statement goes further than expressing the values of solidarity that most Canadians cherish. It makes good economic sense. The integration of migrants into the fabric of a nation has net economic advantages—and even more so to developed economies with low birth rates. Research shows that those who move to a new country in the pursue of a better life work harder, are more entrepreneurial, create more wealth, and even win more Noble Prizes than the rest of the population.
Of course, the results are not so positive when immigrants came to do backbreaking work but receive virtually no rights—as, for instance, those coming to Germany following the 1950’s and ironically called Gastarbeiter (meaning ‘guest-workers,’ as if guests should be expected to do the hard work). Or when, despite French Law and the very principle of égalité saying otherwise, the grandchildren of colonial wars returnees continue to be perceived as second-class citizens. In these cases, full integration will take much longer. But suitable integration helps the host economy to remain vigorous and innovative. Just look at the business, the cultural, and the scientific landscapes in the U.S. and you see the power of first-, second-, and third-generation immigrants. They are the ‘American dream.’
Hence, when it comes to immigration, what is bad for economy is misinformation and ignorance. Trump’s election and the Brexit voting have been the result of populist maneuvers. The Polish plumber, the Mexican rapist, the Islamic fundamentalist, and etcetera (remember the greedy Jew from the Nazi?), are xenophobic fabrications without empirical relevance to national economies. They are mere rhetoric puppets and scape goats.
Populism depends on people believing that a simplistic plan will solve a complex problem, which can only happen if there is misinformation and ignorance. Irresponsible journalism also carries a share of blame on both Trump’s election and the Brexit voting. In the first, the Democrats-inclined media (mostly CCN) gave extraordinary coverage to Donald Trump since the very beginning of the primaries because it was good for the audience rates. When the bad joke went too far, they couldn’t stop it anymore. (But, again, can we consider democratic an electoral system that is so anachronic and so scandalously influenced by big capital?) In the case of Brexit, the British media remained oddly silent for at least a decade of demagogues blaming the fictitious lazy Europeans for their domestic problems. Here goes the simplistic promise: “If your life is not as good as you wished, just exit Europe and the problem will be solved”. Well… that’s not so elementary my dear Watson.
Finally, if we step beyond analyses of national economies and look at the global business, the conclusion remains the same, just more obvious: barriers to migration (as well as barriers to flow of capitals and goods) create distortions to currency fluctuation and to markets’ values, not the other way around. Closing boundaries is a path leading back to economic obscurantism and stagnation.
Bottom line: perceived economic threats due to immigration are hugely overstated. The real problems are ignorance and populisms, which can be solved through decent education systems, responsible journalism, and freedom of speech.
James Trescothick, Senior Global Stretegist, easyMarkets:
In recent times, nothing has provoked more debate or in many cases fear in the general populous more than the immigration topic. In fact, in 2016 we saw two major surprises, first the Brexit result and then Donald Trump winning the US election. Many believe the reasons for these surprise outcomes were that voters making their decision based upon their concern about immigration control.
But let’s answer this question; is immigration really a burden or is it actually a benefit? The answer is it can be both, but it leans towards being a benefit.
How many times have you heard the outcry of “they take our jobs” from those of the public who tend to fear migrants coming into their countries? Let’s face it, it is often the first protest we get. But statistically speaking this is more than often not the case as the jobs that migrants take are the jobs that no one wants or are in totally different fields. The economic impact of migrants can be calculated but looking at the taxes and other contributions they make and deduct the benefits and services they receive.
If of course they receive more than are putting into the economy then they do indeed become a burden, but more often than not, countries have benefitted from immigrants and have seen expansion in economic output in the long term.
When it comes to currency fluctuations and the markets, there is no short-term impact from immigration, as the markets perform based on current and projected economic performance. The outcome of increased immigrants would not show signs if they are indeed a burden or benefit for many years.
Immigration is really a tool for politicians to spark debate and win votes and not a driving a force for the markets.
We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!
The Dow Jones index broke through the 20,000 mark for the first time yesterday, as markets continue to respond to the potentially stimulative economic policies of the new US President. The Dow Jones now stands at over three times the low it reached in March 2009, when it traded at a touch over 6,600 points.
The Shiller CAPE ratio, one of the most widely-used measures of valuation for the US stock market, currently stands at 28.46, its highest level for 15 years. However it’s worth noting that it has been as low as 4.78 (December 1920), and as high as 44.20 (December 1999).
Meanwhile bonds yields have been on the rise recently, as investors brace themselves for further US interest rate hikes and the potential for fiscal stimulus and increasing trade tariffs to fuel inflation. The US 10 year Treasury is now yielding 2.5%, compared to 1.6% six months ago. The UK 10 year gilt has gone from yielding 0.8% six months ago to 1.5% today.
Laith Khalaf, Senior Analyst, Hargreaves Lansdown commented:
‘The Trump jump has propelled the Dow Jones to an unprecedented level, as investors pile into US stocks in anticipation of lower corporate taxes and more government spending. Meanwhile expectations of further interest rate rises in the US, and the potential for inflationary fiscal stimulus, has been putting upward pressure on bond yields in the last few months.
Stock indices in the US and UK may well be at or near record highs, however when the earnings generated by companies in these markets are factored in, stock valuations show neither the extreme pessimism of 2008, nor the irrational exuberance of 1999. This means they are trading somewhere in the middle of their range, so are neither exceptionally cheap or hideously expensive. In the short term the stock market could move in either direction, but for long term investors it still makes sense to keep a healthy slug of their portfolio in equities.
Meanwhile bonds have come under pressure of late, as it looks like the US central bank is in the mood to raise interest rates this year. However there have been many false dusks for the bond market, which has defied expectations since ultra-loose monetary policy was initiated all those years ago in response to the financial crisis. Central banks in the UK, Europe and Japan are still engaged in stimulative activity, and while the US Fed is starting to push in the opposite direction, it’s likely to err on the side of caution lest by raising rates too soon it damages the US economy, and propels an already strong dollar even further upwards. While the best days for the bond market may be behind us, there‘s no sign that interest rates are going to return to pre-crisis levels any time soon, which acts as an anchor on rising yields.’
(Source: Hargreaves Lansdown)
Following the result of the US Presidential Election, Finance Monthly reached to Dun & Bradstreet asking them to discuss the economic impact of the result.
Dun & Bradstreet has held its Country Risk Rating for the US at DB2a following the election of Donald Trump as the next president. The company has also reaffirmed their near-term growth forecasts, as the fundamentals of the US economy remain strong enough to absorb the increased uncertainty triggered by the election result; their proprietary micro-level data supports their forecast that the economy is on track to end 2016 with 1.6% growth.
DOMESTIC IMPLICATIONS
Expansionary fiscal policy is expected to take centre stage under the new president. The US economic expansion of the last few years has been characterised by an over-reliance on monetary policy, and we have been arguing for a more active fiscal policy boost to growth. Infrastructure spending is likely to be one of the biggest and most visible elements of the new government’s fiscal policy. The Trump campaign had proposed an aggressive infrastructure plan in the lead-up to the election. We still need to see more details of how Trump proposes to fund spending on the nation’s highways, bridges and tunnels, and of what that implies for the longer-term budget deficit and public debt burden. Nevertheless, some form of infrastructure spending is a certainty, and the construction vertical will benefit from that.
Tax reform will also be high on the new government's agenda; the extent and the nature of the reforms, including implications for the Foreign Account Tax Compliance Act (FATCA) are, again, uncertain at this point. However, it is almost guaranteed that the new tax policy will involve a reduction in tax rates for both businesses and individuals to jumpstart spending. This will also be one of the areas in which we expect to see extended discussions in Congress. Repealing Obamacare, or the Affordable Care Act (ACA), was one of Trump’s high-profile campaign promises. Since his election, however, Trump has toned down his opposition to this legislation, indicating that some parts of Obamacare are likely to survive. Once again, we need more details on which parts of the ACA will be removed and what sort of policies we can expect in their place. A jump in the prices of healthcare stocks was one of the immediate reactions to the news of Trump’s victory, as investors expect less regulation for health insurers. But other sections of the healthcare vertical, like medical devices, could see a negative impact.
Regulation, in general, is expected to wane under the new government. This will be most significant for the financial services vertical, where a reduction in regulations is expected based on the Trump campaign’s opposition to the Dodd-Frank Act. Parts of the Act are expected to be retained, while the government will try to dismantle the rest of the provisions. More clarity is needed on the new rules that will replace the discarded provisions, but equity prices for customers in the financial services vertical are likely to see increases in the near term.
The key point to note is that most of the President-elect’s proposed and expected policy measures are designed to be reflationary, and work on the assumption that they will stimulate demand and inflation in the US economy. Again, the devil is in the details, which will determine how successful these policies eventually are. We advise our customers to be cognizant of the variations in the data below the topline and to adjust their business strategy based on their specific exposure to certain verticals and how they may be impacted by potential policy shifts.
GLOBAL IMPLICATIONS
The Trump administration’s policies will also have significant implications for the global economy. The Trump campaign ran on an anti-globalisation stance, promising to redefine US trade relations with the rest of the world; as such, we expect a more restrictive trade policy under the new regime.
Campaign promises included a repeal of the existing North American Free-Trade Agreement (NAFTA) between the US, Canada, and Mexico, and stiff opposition to new multilateral trade agreements like the Trans Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (T-TIP). We believe TPP and T-TIP will not go through, as both Congress and the new government will oppose them. The president will likely try to renegotiate the terms of NAFTA, and, if he is unsuccessful in obtaining greater concessions for US exporters, could invoke Article 2205 to leave NAFTA; the president does not require Congressional approval to do so. If the US leavesNAFTA, Canada and Mexico can still be part of it.
The bigger question is over the tone of US trade policy in the next few years, particularly with China. During the campaign Trump promised to impose 45% tariffs on imports from China. However unfeasible such a course of action is in practice, a retaliatory increase in tariffs from China could turn into a trade war that would have adverse impacts on international trade flows and global growth. Moreover, US companies are believed to have invested over USD200bn in China in the past 25 years, potentially making US-owned companies’ supply chains – such as Apple’s –vulnerable to the vagaries of a breakdown in the economic relationship.
Moreover, note that the global impact of the US election result goes far beyond trade relations: significant geopolitical considerations include the new government’s relations with Iran, its policies towards radical Islamist groups such as Islamic State, and its involvement in NATO. Finally, Trump’s success is likely to generate support for the populist leaders who have emerged recently in many European countries. This would reflect a strengthening of a shift towards a more protectionist world, with less support for free trade and globalisation.
