Taxes, trade and immigration likely to dominate Trump’s agenda

The real estate tycoon defeated former US First Lady Hillary Clinton to win the race for the White House on 8 November, and will become head of the world’s largest economy when he is inaugurated as 45th US President on 20 January 2017.

The first big uncertainty is how Trump will behave now that he has secured the victory. How much of some of his outlandish calls have been simply election rhetoric, and how much of it will be put into policy action is anyone’s guess right now.

Having said that, we think it is very unlikely that he will turn into a moderate overnight. For one thing, Trump’s character and track record does not seem to suggest that he is just a shouter: he will want to show the people that he is an action man as well.

The real uncertainty relates to what his exact policy is going to be. We have all seen the statements of Trump, of which there have been plenty. From building a Mexican wall, to prosecuting Clinton; from eradicating ISIS to bringing back jobs from China: he has plenty of options to choose from. The post-election reality will come down to three issues:

1. Taxes: reflating the economy and boosting infrastructure
Tax cuts and infrastructural spending have been high in the list of potential policy changes,” Daalder says. “Although Trump has claimed that the wall between Mexico and the US will be paid for by the Mexicans, it is clear that this is not a realistic outcome. If he really starts to build a wall, it will be mostly at the expense of the US government finances.

In itself, this may be a positive spin on things, as Having said that, unlike building a bridge which lowers transportation costs which has a longer-term positive impact on the economy, this is not the case with a wall. The so-called multiplier effect of these measures will be limited.

2. Trade: breaking deals is easier than making them
Any US President has extensive freedom to act on trade deals; making them is a long-lasting process, but breaking them is much easier and does not require Congressional approval. It’s the path of least resistance and will be applauded by the electorate, so this looks like an obvious risk.

China is an obvious target (‘bringing back jobs’), but with the big current account surplus of Germany, it is clear that Europe is certainly not outside the risk zone. This may sound unimportant, but the main reason why the Great Depression in the 1930s was as long-lasting and painful as it was, was because of the trade wars that took place. Of course, we do not forecast such an outcome, but it should be clear that there is a big downside risk involved with this.

Stock markets have jumped on this reflation story, but have ignored the downside. We question the effectiveness of the reflation, given the low multiplier and possible political resistance, and believe that the path of least resistance is having a trade war instead.

3. Immigrants: deportation may mean economic contraction
One of the other claims Trump has been quite vocal on is the issue of the so-called undocumented immigrants,” Daalder says. “Again, we do not know how much of it has been rhetoric, but it has been estimated that his plans would target between 5-6.5 million immigrants.

If these people are indeed deported as Trump has indicated, it would have a pretty negative impact on the economy of the border states. This would lead to a huge reduction in domestic demand, as well as disrupt certain industries that currently employ these people.

More uncertainty whatever happens
Even if the worst outcomes don’t materialize, investors still face at least a year of uncertainty. “The one thing that is clear though, is that this election outcome has added a lot of uncertainty to a system that was already pretty feeble.

In our outlook for 2017, we had a pretty positive view on the world economy – something that we have now lowered. With China and Germany possibly at risk from a trade balance perspective, it is clear that the world economic outlook has not improved.

An increase in uncertainty, combined with a lowering of the growth outlook for the world economy at large, means that we think that the risk-reward trade-off for risky assets has deteriorated. From a tactical perspective, we have reduced our exposure to equities and high yield in our model portfolio, and have gone for an overweight in cash.

As for bonds, the outlook is more mixed. The higher government deficit, the increase in inflation (linked to possible import tariffs) as well as the threat of selling pressures by the Chinese in case of an escalating trade war, all could put pressures on bonds.

Lukas Daalder, CIO at Robeco Investment Solutions

ABOUT THE AUTHOR
Mona Dohle
Mona Dohle speaks German and Dutch and is DACH & Benelux Correspondent for InvestmentEurope.

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