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Can Trump deliver on his promises? What investors should watch

10 November 2016

JP Morgan Asset Management’s Stephanie Flanders gives her take on the election of Donald Trump as US president.

By Stephanie Flanders ,

JP Morgan Asset Management

Many parents today are wondering how to explain to their children how Donald Trump could break so many of the rules we try to teach them, and still get to the White House.

The job of investors looks easy by comparison – they just have to work out what this extraordinary event is going to mean for world markets.

‘If Clinton wins, I’m selling the US and buying the world. If Trump wins I’m buying the US and selling the world.’ That’s what one seasoned investor told me his US election strategy was going to be, some time ago.

If president Trump really does ‘put America first,’ many investors will be minded to do the same. it’s bad news for the rest of the world to have a man in the White House who has railed so long and so hard against open trade, and appears to care so little for the main pillars of the post-war international order. 

But that is for the long term.

Short term, financial markets should learn a lesson of Brexit – which is that even political earthquakes with profound economic consequences do not change the world overnight, or in a predictable fashion. In the short term the best thing that most investors can do will be to sit tight and look for clues from Trump’s first few weeks.

There will be three key tests for Donald Trump in this early ‘watch and learn’ period.

The first will be for him to build a strong cabinet, with respected figures in key posts of Treasury Secretary and Secretary of State. Second, he needs to continue to give voice to the calmer, more gracious version of himself that was on display in his election night acceptance speech. 

No-one should expect him to repudiate everything he said in the campaign about open borders and trade deals such as the Trans Pacific Partnership Agreement. But the third test for the president-elect will be to demonstrate that he does not plan to tear up the parts of the Washington establishment that are actually working quite well – notably, the US Federal Reserve.

From a market standpoint, probably the single most reassuring statement that Mr Trump could make over the next few weeks would be one saying that he supports the independence of the US central bank and he would delighted to see Janet Yellen stay as chair when her current term ends in January 2018. On the campaign he said he would replace her. That’s one promise he should break. (Of course, whether chairwoman Yellen will want to stay is another matter.)

We literally have no idea what this new president is going to do, or how president Trump will compare with Trump, the candidate – or Trump the reality TV star. That in itself will be a worry and source of volatility for markets in the weeks to come.

But we do know that he is much more in favour of cutting taxes than Hillary Clinton was, and spending more on defence. Like her, he favours increased infrastructure spending. He also appears more than happy to see government borrowing go up. 

This all suggests that fiscal policy will be looser under president Trump than it would have been under Hillary Clinton. A Republican Senate will not give him a blank cheque. But spending increases and tax cuts are easier to pass than the opposite, and genuine fiscal hawks in Washington are now something of an endangered species.

It is more difficult to predict what will happen to other economic policies which featured prominently in the campaign – notably trade and immigration. But, by their nature, these are going to be a slow burn.

The new president cannot put an end to global trade growth, any more than the trade deals that president Obama was negotiating would have caused it to have a renaissance. There is a long list of reasons why trade has been growing slower than the world economy for the past five years. Protectionism or a lack of new trade deals is only a small piece of the puzzle.

The combination of looser fiscal policy and increased uncertainty over globalisation would be likely to mean a stronger dollar and potentially higher US inflation and higher interest rates. That is not a hugely helpful combination for the rest of the global economy, especially emerging markets.  

But that, too, is uncertain and could take time to materialise. In the meantime, my colleagues and I are not predicting a radically different path for the US economy following this result - or for US interest rates.

We will live with the consequences of this vote for many years to come, inside and outside the US, but let’s not fall into the trap of thinking the impact can begin to be measured by what happens on Wall Street – or to the dollar. This is about the kind of country that America wants to be.

At the heart of Donald Trump’s appeal was a promise to make it a nation that works better for the mass of voters who feel they have been left behind by globalisation and by the global financial crisis. For better or worse, that is the standard by which every developed country politician will increasingly be judged.  Whether Mr Trump will actually deliver with on that promise is another matter.

Stephanie Flanders is chief market strategist for Europe at JP Morgan Asset Management. The views expressed above are her own and should not be taken as investment advice. 

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