Donald J Trump is poised to become the next President of the United States of America, one of the most controversial and divisive Presidents the country has ever had judging by recent polls.
What will the consequences of this victory be? It’s incredibly difficult to know and therein lies the challenge. Candidates generally track towards the hopes and dreams of their core electorate during the primaries and election campaigns and even the firebrand Trump has seemed to learn the importance of moderating his position to avoid alienating or antagonising voters.
Trump, though, is an anti-establishment candidate who appears to be resistant to advice and insensitive to nuance and detail in situations. As such we will now learn whether he follows the tendency of previous elected presidents to moderate their positions in response to representations from advisers (including this Joint Chiefs of Staff, America’s senior military leaders), lobbyists and the whims of Congress.
Trump’s predecessor, President Obama, enjoyed just one two-year spell in which his party controlled both houses of Congress. During that period he managed to pass the Affordable Care Act (Obamacare). President elect Trump promises to ask Congress to repeal this legislation making the same piece of legislation the centre piece of both Presidents’ legislative agendas.
Trump has the will of Congress which he needs in order to make this happen. He has described some features of a replacement and it is not unreasonable. However, a repeal of Obamacare will have a far reaching impact and the subject will be very significant to Congressmen who will face re-election in just two years’ time.
Trump is also generally anti-regulation. Ironically, for a populist and protectionist candidate, that places the interest of business ahead of those of consumers and taxpayers.
Beyond that Trump has promised sweeping tax cuts which are likely to face significant hurdles from fiscally conservative Congressmen given that they are unfunded (they would add substantially to the national debt).
We can expect that agreement can be reached on some portion of these cuts providing a fiscal boost. It would be preferable for taxes to be used to fund infrastructure investment and Trump has promised this as well but his detail is particularly lacking in this area.
The US political system is hardwired against fiscal spending as it requires the support of Congressmen, all of whom must seek re-election again in just two years, and who need to protect their district’s interests above those of the nation.
Tax cuts are generally more achievable as they are enjoyed by all, but it is hard to see an even distribution of infrastructure investment making it hard to gain House support. Trump appears to lack the conviction and the diplomacy to achieve a significant infrastructure deal.
The most significant impact of Trump’s win is likely to be his promise to impose substantial barriers to trade with Mexico, virtually undoing the North American Free Trade Agreement (NAFTA) and taxing financial transfers between the US and Mexico as part of his plan to build a wall and make Mexico pay for it.
He proposes a similarly antagonistic attitude towards China. His willingness to follow through on these bold and aggressive policies is one of the reasons that investors had expressed a preference for the status quo, represented by Hillary Clinton. This is a testament to the market’s preference for certainty over uncertainty or perhaps more accurately for predictability.
Hillary Clinton is actually considered to be more hawkish on foreign policy than President Obama and under her tenure there would, for example, have been concerns about how antagonistic relations with Russia might have become. President elect Trump might be expected to take a less antagonistic tone given he has hinted at greater co-operation with Russia during his campaign, so relations with Russia will be an area to pay close attention to over the coming months.
In general though there is relatively little that was tangibly preferable about a Clinton Presidency which is immediately appealing to investors, other than avoidance of uncertainty. By contrast there was a reasonable amount which would appeal to investors by a pro-business republican if it were presented by a less abrasive character than Donald Trump.
We suspect that investors will develop a degree of acceptance of the new President and will focus particularly on the prospect of some meaningful fiscal stimulus. Over the medium term there is much to learn about the character of Donald Trump as a sitting President but from an investors’ perspective the features of his tenure are likely to be much more positive than the market’s performance during the campaign would imply.
The above article by Guy Foster of Brewin Dolphin was first published on 9th November 2016.