Trump wins, what now?

• The initial market response has been for the dollar to rally and US bond yields to rise. Unlike in 2016, this outcome did not come as a surprise and markets were broadly positioned for a Republican win based on Trump’s recent momentum in the opinion polls.
• The speed with which the results have come out means there won’t be a long drawn out wait. Markets hate uncertainty.
• Unlike in 2016, a Trump presidency is broadly a known quantity. In terms of economic policy, he stands for tariffs on imports into the US (especially against China), he is anti-immigration, and he is in favour of lower taxes and deregulation.
• Some of these elements will be disruptive for businesses. Tariffs will complicate the business environment, and without immigrants, many will struggle to find workers. Tax cuts and deregulation on the other hand, are arguably positive for businesses.
• However, these tax cuts will have to be funded by additional borrowing, and therefore we’ve seen upward pressure on bond yields.
• If Trump’s policies are enacted fully, we will probably see the Federal Reserve not cut rates as much, given inflationary risks. However, the Fed is still likely to cut rates later this week by 25 basis points.
• This means the dollar could be somewhat stronger than in an alternative scenario, which puts some pressure on emerging market currencies and interest rates. While the rand is trading about 1.5% lower this morning, this is not a big move by its historic standards and therefore does not change the outlook for SA Reserve Bank rate cuts in the short term. A cut at the next monetary policy committee (MPC) meeting is still likely.
• In terms of geopolitics, we can expect Trump to put pressure on Ukraine to start negotiations with Russia, while he will probably support Israel in its war with Hamas and Hezbollah. He will also take a hard line on Iran. While he is hawkish on China, he is probably less likely to stand up for Taiwan.
• Given South Africa’s stance on some of these issues, it becomes a more challenging foreign policy environment for us, and requires greater diplomatic skill on our part. However, Trump probably is not terribly interested in Africa or South Africa.
• It does mean that South Africa should continue its path of economic reform so that we are more reliant on internal growth drivers, particularly investment, and not on the global environment. However, we should expect that local markets will always move in line with global trends as has been the case over the decades.
• A Trump presidency is not necessarily good or bad for markets, but we should expect more volatility given what we know of his first term. Policies could change at short notice. We would urge investors to look through the noise and focus on the underlying issues. Historically, the US stock market has performed well irrespective of which party controlled the White House (the two terms of George W. Bush was an exception, given that it coincided with the dotcom crash at the start and the financial crisis at the end).
• Ultimately, investors should focus on being appropriately diversified and sticking to their investment plan. Though there will be winners and losers across different sectors of the global economy, this election outcome does not call for a major shift in strategy.