A late-night cryptic Donald Trump tweet that appeared to have been sent out accidentally was one of the latest examples of the surrealistic nature of the White House. This was compounded by Trump’s dramatic decision to pull out of the Climate Paris Agreement, turning the United States into an international pariah.
But perhaps White House amateurism only strengthens investors’ conviction that Trump will not (be able to) follow through on some of his radical promises, such as his vow to increase import tariffs and renegotiate trade deals.
His approval ratings are already at an all-time low, and the fact that introducing tariffs on goods imported from emerging market countries would be detrimental for the US economy would stop him from pursuing such plans, believes Guillermo Osses, head of emerging market debt at MAN.
“If he were to keep each one of his promises, what you would find out is that US GDP would contract for three years after implementation of tariffs on goods imported from China and Mexico,” Osses told investors at the Expert Investor Lisbon forum recently.
“It would take two more years for GDP to get back to pre-election levels. That means Trump would end his presidency with lower level of output than when he started,” said Osses, adding: “Unemployment would increase from 4.5% to 9.5% which is not too far from where they were at the height of the financial crisis. We think it’s impossible for the US administration to politically tolerate such a situation.”
The first four months of Trump’s presidency, however, have shown most decisions in the White House are not taken on the basis of rational arguments. Therefore, one should be careful not to discount completely the possibility that Trump will go down the protectionist route anyway.
Boom and bust
Ian Heslop, head of global equities at Old Mutual Global Investors, also sees problems on the horizon if Trump gets his plans through. But these are of an entirely different nature. According to Heslop, the biggest risk is that Trump delivers more than the market currently expects in terms of fiscal stimulus, which would lead to a classical boom and bust scenario.
“We’re in an [US] economy that’s already running pretty tight. If you start throwing $0.5-1trn of infrastructure spending on an economy that’s running at 4.3% unemployment, we all know where we are going, and that it’s not going to be a pleasant environment for inflation and not an environment where the Fed can hold rates,” he said.
“My fear is that Trump will do more than people expect. Inflation will be higher than expected, interest rates will be higher than expected and that will have an impact on valuations in the US market.”
However, Trump’s sheer unpredictability and his dependency on Congress make it hard to assess whether he will succeed or fail. Therefore, Heslop concluded, it “is somewhat difficult” to take the Trump-factor into account when building portfolios.