The election of Donald Trump as US president represents a sea-change in politics and for a second time in less than six months, following the UK’s Brexit vote, investors are left unscrambling the implications for markets over various time horizons.
Ahead of the election, investors saw a short position on the Mexican peso versus the dollar as a key instrument to hedge against a Trump win. Indeed, the Mexican peso fell 7.5% the day after the election. Healthcare, tipped to benefit from Trump’s policies, was up 3.3%.
Overall, the initial market reaction was muted but the longer-term implications are less clear. Trump’s hostility towards free trade and institutions of supranational governance, including NAFTA and NATO, have been widely discussed. It is assumed that a more protectionist US with higher tariff barriers to trade will lead to lower growth and prosperity over the long term. Precisely how and the extent to which this plays out will remain a matter of conjecture.
Trump’s election will be judged with hindsight as a key staging post in a series of political events that includes Brexit and the possible success of populist parties and candidates in Dutch, French and German elections across 2017.
There is an indisputable current of popular discontent in the West, probably caused by declining living standards among a large section of the population. Populist, usually right-wing, politicians, parties and movements, including Trump, have succeeded in harnessing this discontent using anti-immigration, anti-globalisation and anti-elite rhetoric to fan the flames.
In the US, much will hinge on the administration that Trump forms and there was moderation in his tone after his election. A mainstream Republican appointment as treasury secretary would reassure markets. Trump’s Keynesian ambitions on infrastructure spending may remain an aspiration as it is uncertain how he would push an ambitious package through a fiscally conservative Republican Congress, even if there is support for more infrastructure spending.
Trump’s hostility towards tackling climate change is worrying and his rhetoric has extended to questioning the global warming science itself. While the Paris Agreement became international law in November, an about-turn on US climate change policy – as looks likely – represents a setback to the 2°C carbon emission reduction target. It will also weaken the resolve of others.
Pragmatism and Trump’s supposed deal-making skills may soften the edges of his presidency as stump promises are abandoned. Or his presidency may become mired in acrimony and failure as the contradictory nature of his objectives becomes clear. For investors, political uncertainty is back like never before.