Investors everywhere need to consider the impact of US election result – Straight Talking

Welcome again to our regular Straight Talking column – written by senior financial planner at ipac WA, Bob Miller.

Hillary Clinton is a clear favourite to win the presidential election, but the Brexit vote and the AFL finals remind us that upsets can occur. Donald Trump may yet become the next US president and commander-in-chief. Investors everywhere need to consider the impact of win by either candidate.

A win by the controversial Republican is likely to create far more geopolitical stress and uncertainty than win by the former First Lady. Global markets are likely to express risk aversion in the event of a Trump triumph and an initial outflow of funds from shares to bonds would not surprise.

Trump’s strong preference for protectionism over free-trade augers badly for world economic growth. On the other hand, Clinton’s recent offer to jettison the Trans Pacific Partnership back-flipped on her earlier position … and panders to Americans who demand protection from imports. Let’s look at the key economic proposals of both candidates

Both candidates want to spend, big time, on infrastructure. Trump is not a conventional conservative and does not espouse the usual Republican articles of faith: smaller government and deficit reduction. Initially Trump plans to spend between

$800 billion and $1 trillion on infrastructure, as well as sizeable chunks of money on child care assistance and maternity leave. Given that Trump also plans to slash tax, the US budget, at least initially, must blow out under his administration.

Clinton’s administration would, initially at least, see a smaller blowout in the budget deficit. Her infrastructure package is priced at about $500 billion, in addition to heavy outlays on healthcare and college students. Unlike Trump, however. Clinton proposes to raise taxes, especially on the richest Americans.

Both candidates pay attention to the views of JM Keynes, the British economist who proposed additional government spending in tough times. But given that current economic conditions in the US hardly warrant the “tough” tag, we need to outline the economic logic behind the substantial deficit spending proposals by both candidates.

A starting point is new business investment, which not only enhances worker productivity, but the additional spending represents income for the owners of resources, including labour. New investment spending in a tightening labour market serves to ramp up wage levels and provide more spending power in the economy, in turn inducing further new investment.

Record low interest rates on their own have not delivered the new investment envisaged by central banks when they engineered quantitative easing and ultra -low interest rates. Purchasing existing assets forces up prices, but has limited economic benefits. Compounding the problem is that many small businesses people are keen to invest in new plant and equipment, but are told by their banks that the family home must be put up as loan security. Unsurprisingly, many business families balk at such a demand.

For Australians, the most important economic policy relates to free trade: both candidates have shown a willingness to dismantle free-trade agreements. Our economy stands to lose if the Trans Pacific Partnership is shelved. Yes, in a changing world jobs get lost. Labour – saving technology has seen a substantial reduction in the demand for Labour. Many thousands of American manufacturing jobs were lost to low-cost operations elsewhere.

But the imposition of tariffs is unlikely to bring back the lost manufacturing jobs Furthermore import prices rise under tariffs, further reducing the spending power of consumers. Ultimately, specialisation and trade determine economic health.

Trump’s tax cut proposals are fascinating. Cuts to the top rate of income tax and estate tax would be decided benefit to the super rich in the US. The trickle-down theory suggests that additional purchasing power of the very wealthy produces significant benefits for the not-so rich. That’s contentious and invites us to believe that giving out say $10 billion to one million “ordinary” households induces less economic activity than the same amount handed out to one thousand super-rich households. Regardless, Trump’s tax plan will ensure that the budget takes a bath … at least in the early years.

Trump is on much firmer economic ground with his proposal to slash the company tax rate from 35 per cent to 15 per cent. If enacted, it should send a clear profit signal to US business decision-makers. It would surprise if a 15 per cent tax rate did not lead to a large increase in new plant and equipment. Investment, with all its economic benefits for output, income and employment, should go through the roof.

All other factors equal, a flat 15 per cent tax rate must lead to greater company profits and higher share prices.

Much lower corporate tax rate is also likely to cause American companies with offshore operations to repatriate more of their profits into the US economy. We would expect a strengthening of the US dollar and a corresponding weakening of all other currencies. Such a development would serve to advance the cause of Australian exporters, but disadvantage our importers.

In summary, a reduction in free-trade is likely to generate slower worldwide economic growth. Hillary Clinton’s views on this subject are not as strident as those of Donald Trump. Hopefully, she was simply pandering to those in the electorate who fear free trade …. and when the time comes, reverts to her former pro- free trade position. On the other hand, a Trump victory could end up giving US business its biggest boost in decades … and perhaps compensate for a decidedly unwise trade policy.

 

If you would like to discuss anything that you read here, feel free to contact an ipac WA financial planner today to meet with us in our Perth offices and see how change can impact you.

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