Though most people in the UK are still struggling to believe it, chances are Donald Trump will be a candidate in the upcoming US presidential election. 
The real estate mogul and media personality, who has funded his own campaign, has struck a chord with many Republican supporters thanks to his rhetoric surrounding immigration, foreign policy and very laissez-faire attitude to government intervention.
Of course, there are still no guarantees that ‘The Trump’ will lead the Republican Party to the election in September given Ted Cruz’s popularity in certain states. That being said, there is a significant chance he would run as an independent if Cruz or John Kasich were to win the ballot, which would make things very interesting.
Still, though, the bookies are preparing for a Hilary Clinton-led Democrat victory at the polls no matter who leads the Republican Party.
Though Trump will no doubt have to moderate if he is to stand for the election in order capture the floating voter, his statements so far (“We will build a wall and they will pay for it”, being one of them) have led many to view his rising popularity as a major headwind for global financial markets.
Indeed, FE Alpha Manager Richard Woolnough said recently that the upcoming election in the US is what the market should be worried about – not the June referendum on the UK’s future relationship with the EU.
“The likely impact on UK credit will be noise and uncertainty, but although Brexit fears are likely to cause volatility, a far more important political issue is the US election: investors should be less concerned with the EU referendum and focus more on the possibility of Donald Trump as US president,” Woolnough said.
Speaking during a recent research trip to the US hosted by Neptune Investment Management, Barry Eichengreen – former senior policy advisor to the International Monetary Fund and now professor of economics and political science at University of California, Berkeley – gave his thoughts on Trump’s huge rise in popularity and the impact his victory at the election in September would have on markets.
According to Eichengreen, there are four primary reasons behind his surge in the polls – and they are all longstanding issues that have largely been masked by the housing boom prior to the global financial crisis.
These are the developing inequality problem since the early 1970s in the US, concerns about the US’s trading partners, immigration and the US’s role in the world.
Eichengreen believes the first point is the most important and says it is borne out in a recent survey from the Pew Research Centre, which found that Trump had the largest proportion of supporters who believe that present day is worse for the average American than 50 years ago.
Source: Pew Research Center
Indeed, he draws comparisons between Trump’s supporters and those favouring a Brexit – suggesting similarities in the belief that many in the US and UK feel they have “been left behind” by recent governments.
While this may explain Trump’s surging popularity, Eichengreen says that his policies will still have profound effect on the US and therefore global markets.
“On fiscal policy, Trump would cut taxes across the board. He would only have one or two tax brackets, which would be much lower than the current level of tax so I think it’s clear his cuts would blow a gigantic whole in the budget,” Eichengreen said.
“In terms of financial reform, Trump would repeal the Dodd- Frank Act of 2010 but hasn’t provided an indication of what financial reform, if any, would be used as a substitute.”
Dodd–Frank Wall Street Reform and Consumer Protection Act was brought in by president Barack Obama in June 2010 in order to “to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail’, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes”.
It has been the largest piece of financial regulation since the Great Depression. While the deregulation of the banks in the late 1980s through to the 2000s caused soaring financial markets, any changes to the current system are seen as dangerous by many.
However, Eichengreen added: “I’m hesitating to say it, but Trump is relatively normal on monetary policy.”
“He likes Paul Volcker, I like Paul Volcker and his views on monetary policy may be hawkish. It’s relatively normal for politicians to be critical of the Fed and advocate being more hawkish, but he hasn’t said anything outlandish about monetary policy.”
The economist points out that Cruz, on the other hand, is keen to return the US to the gold standard – a monetary policy that was canned during the 1930s due to its role in the Great Depression.
That being said, he also notes how Trump plans to blow up the US’s existing trade agreements – a move that many are worried given the prospect of a trade war in that scenario.
Eichengreen believes Hilary Clinton will be the next president of the US, but says uncertainty still prevails in relation in to official and confidential messages that were sent from her personal email address during her time as secretary of state.
As such, if Trump were to win the election, he says the effect would be very negative for financial markets thanks to his right-wing polices and a resulting fall in sentiment among global investors.
“Betting markets are still running a 90 per cent probability of a Clinton victory, but if Trump were to win the nomination I don’t think it would have any immediate effects. You can’t necessarily rule out a Trump victory at the election, though, and in my view is that it would be very bad financial markets in general.”
Indeed, Eichengreen believes that global equity markets would see severe volatility and hefty falls if Trump were to win the Oval office.
This belief is shared by many, though opinion differs on which areas of the market would be hit hardest.
Matt Linsey, managing partner and portfolio manager at North of South Capital LLP, believes Trump’s isolationist policies would put further pressure on emerging markets, an asset class many have been upping their exposure to recently given the low valuations on offer following years of relative underperformance to the likes of the US.
Performance of indices over 5ys
Source: FE Analytics
“One ‘tweet’ by Hillary Clinton a few months ago regarding excessive drug prices was enough to send biotech stocks into a tailspin,” Linsey said.
“Although it is by no means certain that Donald Trump will win the Republican nomination, he has suggested a number of protectionist measures that would certainly impact the emerging markets.”
Azhar Hussain, head of global high yield at Royal London, says the beaten up high yield market – which has fallen significantly recently thanks to low energy prices and the concerns surrounding a global recession – would take another hit.
“The threat of ‘Trisk’ in the upcoming US election is being majorly underplayed,” Hussain said. “The Republican fiscal stance is horrific and the economic implications should be considered.”
Most still agree that it would be risk assets would be the most exposed to Trump victory, but Eichengreen points out that a certain peculiarity within the US may mean investors can profit from the uncertainty such an outcome would create.
“However, the difference about the United States is that things that are bad for financial markets tend to be good for the dollar. The dollar remains the only safe haven currency, so when Lehman Brothers failed the dollar strengthened because people value safety of liquidity,” Eichengreen said.
Performance of indices in 2008
Source: FE Analytics
“The US treasury market is the most liquid financial market in the world, so we might see that peculiar chain of events again [if Trump became president] – financial markets that crash and a dollar that strengthens to the extent that US exports become less competitive are not a good combination for the US economy.”
Alex Paget was recently a guest of Neptune Investment Management on a research trip to San Francisco.