America under Trump: What would Donald do to trade, the dollar and investment in the US?

 
Annabelle Williams
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When it comes to money, he's given a few insights into what a Trump Presidency would look like (Source: Getty)

Donald Trump is the last man standing in the Republican race for the White House. With six months to go until November’s presidential election, it’s almost certain Trump will stand against Democrat candidate Hillary Clinton.

A businessman with no political experience, Trump has been pretty vague on policy details and some of his claims are so outlandish it’s difficult to know whether he’s serious.

Will he build a wall along the border with Mexico, and make them pay for it? Will Muslims be banned from entering the US?

But when it comes to money matters, Trump has given a few nuggets of insight which analysts are using to predict how America will fare.

BUSINESS

Trump has divided the Republican party, and it’s not surprising given he’s more of a political chameleon than a traditional Republican. His campaign was based on a staple right wing promise of lower taxes but he recently tweaked the message by saying wealthy Americans will probably pay more tax.

It’s “another attempt to seduce the working class and a major break from traditional Republican doctrine,” says Philip Marey of Rabobank.

Trump also supports raising the minimum wage. Clearly aimed at blue collar workers, this would increase costs for firms. “He is trying to appeal to working class Americans instead of corporate America,” Marey adds.

It also comes at a time when US wages are at a record low in relation to the country’s GDP – which is why corporate profits are relatively high.

This is a worrying sign for companies as people have less to spend and companies may eventually be forced to pay higher wages.

It also explains some of the discontent that’s driving alternative politics, reflected in the surprising success of Democratic hopeful Bernie Sanders. “You need to be wary... You end up with social unrest and you can see it in the political movements at the moment that are trying to change society,” says James Hanbury of Odey Asset Management, adding this is the reason he’s cautious on the future prospects of the S&P 500.

TRADE AND THE DOLLAR

Trump has also galvanised support as he promises to revive US plc by penalising foreign imports, perhaps with a 45 per cent tariff on Chinese goods.

He has an “extreme policy position on trade, which calls for a total overhaul of existing US trade agreements and possible punitive action against trading partners,” says Libby Cantrill of Pimco.

There is some precedent, as the US just placed a 266 per cent charge on imported Chinese steel. President George W Bush also started a small international trade war when he raised steel tariffs in 2002-3. “The EU threatened retaliatory tariffs on US products and many major countries, including Japan, China, Korea and Brazil filed suits with the World Trade Organisation,” explains Marshall Gittler at FXPrimus.

The dollar may be the first casualty, as it fell 22 per cent during the Bush trade war period, says Gittler. Trade tariffs can also raise costs for both businesses and consumers.

Read more: Currency wars will continue

Even if Trump fails to reach the White House, his rhetoric has set the tone for political debate in the US. “Trump has been railing against jobs going to Asia... What we will start to see is those frustrations will creep into policy,” says Jason Hollands of Tilney Bestinvest. “These leaders don’t have to get elected – they pull the debate in a certain direction.”

INVESTMENTS

Trump says he’s pro-business, and interestingly Clinton is the one who’s perceived as being less business friendly. But some policies, alongside his conflicting and often confusing views, aren’t great for US corporates.

“What are investors supposed to do with a candidate whose economic ideology is divergent from that of his party’s, not to mention often inconsistent and fluid?” says Cantrill.

If Trump is elected, the old adage that S&P 500 trackers are the best way to invest in the US may go out the window. Investors would likely benefit from a more company-specific approach.

Read more: Trump tells Cameron he's not stupid

Indeed, equity markets hate uncertainty, and this has been a poor year so far for the S&P 500. It’s risen a paltry 2.6 per cent.

History shows the S&P 500 performs better under Democrats than Republicans – as it made an average 11.4 per cent annually through Democratic leadership compared to 4.8 per cent with Republicans.

FEDERAL RESERVE

Policy coming out of US central bank, the Federal Reserve, has a huge impact on economies around the world, whether its interest rates or QE money printing. The Fed operates independently of the White House, so Trump wouldn’t have immediate influence.

However, he does want to remove some of the Fed’s powers, allow Congress oversight of its decisions, and use his powers to get rid of chair Janet Yellen because of her political views.

Meanwhile, economists view the US as a strong economy which could withstand higher interest rates, but Trump says it’s a “reasonably crippled economy” and says raising rates would be “scary”. In fact, very low interest rates are “the best thing we have going for us”.

“People think the Fed should be raising interest rates. If rates are 3-4 per cent or whatever, you start adding that kind of number to an already reasonably crippled economy in terms of what we produce, that number is a very scary number,” Trump said.

Trump has stated the US doesn’t need to pay back its debt, because “you can just print more money”. This has huge ramifications for bond markets, and yields on US treasuries may rise if he is elected.

Read more: China's drowning in debt

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