A Donald Trump Win: What it means for Australian Investors
Overnight, we received the dramatic news that Donald Trump had been elected president for the second time, the Republicans appearing to have control across both houses. The US share market rallied to record highs.
However, what may appear to be good for America, in terms of market rallies in the shorter term, may not be good in the longer term for the US and the global economy, including us in Australia. The American economy is still the world’s largest economy, and it is key to determining the direction of global markets. From our perspective, here in Australia, the key outcomes of Trump being president again, and of his policies, may well be inflationary and affect the growth of our economy.
To help us understand the potential economic and policy implications, leading Exchange Traded Fund provider, Betashares(1) recently shared some helpful insights which can be summarised as follows:
Key Proposed US Policies under a Trump Administration
Cut corporate tax rate from 21% to 15%
Increase taxes on buybacks and companies’ foreign income
Extend 2017 personal tax cuts for all
Eliminate US tax on Americans living abroad
Tax deductions on auto loans
Repeal green tax incentives in Inflation Reduction Act (IRA)
End US aid to Ukraine.
Trump’s corporate tax cuts are expected to provide a short-term sugar hit to equity markets, much like we saw during his first presidency…
Bond yields and the gold price have both surged in recent weeks, in a sign that markets are pricing in a greater likelihood of inflation and larger US budget deficits with the Trump policy platform.
Source: Bloomberg, as at 25 October 2024. Past performance is not indicative of future performance.
US Trade and Tarriffs
Impose universal (10-20%) tariff on all imports
60% tariff for all Chinese imports and revoke China’s ‘Most Favored Nation’ status
Further tariffs on certain auto imports
The Peterson Institute(2) estimates the potential revenue from Trump’s tariffs at $225 billion a year (before factoring in blowback from retaliatory actions from other countries) and will not come close to funding his tax cuts. The other danger in Trump’s tariff plan is the risk that it feeds into inflation and results in a stronger USD that removes the effectiveness of the tariffs in the first place. While the tariff threat to China must be taken seriously, some believe Trump’s proposed universal 10-20% tariff is merely a negotiating tactic to improve trading terms with other nations, including removing levies imposed on goods imported from the US.
Immigration, Energy and the Fed
Deport unauthorised immigrants, strengthen border controls and reduce immigration
Repeal the IRA green subsidies
Boost oil and gas development, LNG exports and power plant construction
Potentially allow input from the President on Fed policy
Trump’s immigrant policies do threaten economic growth, as a smaller workforce means lower GDP growth. While fewer workers could increase labour market tightness that feeds into higher inflation, the reverse is also possible – fewer consumers may reduce inflationary pressures, allowing the Fed to cut by more to support the economy.
Energy is a key part of Trump’s promise to keep inflation down. He favours opening up new land for drilling, offering tax relief for energy companies, and speeding up the approval of permits and pipelines in order to boost oil and gas production to keep energy costs down.
History demonstrates that staying invested—regardless of which party is in power—generally has been one of the most reliable strategies for achieving long-term returns.
The last time we had genuine volatility across a presidential period was back in the days of George W. Bush. For context, that period saw the tail end of the dotcom bubble, 9/11, wars in Iraq and Afghanistan, and it was topped off with the global financial crisis.
Investors who were globally diversified across multiple asset classes may not have seen a world beating return, but they did retain, and continued to grow their wealth across the George W. Bush Presidency. Those who were all in on large cap global stocks didn’t do so well and had to be incredibly disciplined to stick with their singular strategy that ended in the red.
This isn’t suggesting large cap global stocks are in for turmoil, merely that if we crowd into a narrower and narrower asset class, we’re more and more exposed if that asset class doesn’t like the weather out there. There’s always an underperformer, so don’t have a preference for anything.
The message? Keep doing what you’re doing. Expect volatility. Stay diversified. Rebalance when your adviser recommends it. Ignore the huff and puff in the media. The US President remains just one variable in a constantly changing world. America will survive another president – however unpredictable and volatile he might be!
References:
Gleeson, Cameron (2024) 2024 US Election: What it means for Australian investors, Betashares blog, 30 October. Available at: https://www.betashares.com.au/insights/2024-us-election/ (Accessed 6 Nov 2024).
Petersen Institute for International Economics https://www.piie.com/