Read the previous week’s Investment matters.
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At recent First Samuel CIO Dinner events, the question of the US election was regularly raised. We responded that the market had built in the expectation of a Trump victory, with the downside risks relating to a combination of:
- Harris victory
- Extended uncertainty regarding the result
- Any violence or social unrest relating to the election
The expected Trump victory already saw a rising longer-term outlook for higher inflation, one element leading to rising long-term bond yields.
Three days after the Trump victory, the analysis appeared confirmed.
The victory was clear, and there remains no uncertainty about who will be the next President. Investors have been relieved; hence, we have seen a positive reaction to risk assets. Equities in the US are higher, gold prices fell, and bonds sold off (higher yields).
Perhaps only in stock market could a Trump victory be seen as reducing uncertainty. The entire campaign highlights the toxic level of fragmentation with US politics, and which increasingly extends to the rest of the world. With higher fragmentation the outlook for higher volatility persists.
The Market
Increased partisanship
The chart below, albeit only covering the period from 1994 to 2022 shows how Democrats feel about Republicans and vice-versa. After the Supreme Court overturned its earlier pro-abortion decision (the celebrated case of Roe v. Wade) and following the impact of the election campaign, we can imagine that the level of partisanship has only increased.
Partisanship in the United States – Very Unfavourable View (%)
Source: Pew; Macquarie Global Strategy
Whilst we haven’t reached the level of partisanship in Australia, this could change. In Australia and the UK, much of the non-economic commentary has questioned the alignment of values between our nation and a nation that could elect Trump as its president.
We consider Trump’s election important from the perspective of a global hegemonic power veering away from values its partners once imagined they understood. When aligned with a hegemonic power, partners can easily import the hegemon’s value systems. In the past 30 years, we have seen monetary policy, aggressive neoliberalism, trends calling for smaller government, and the sales of public assets as examples of partially imported policy.
For nations such as Australia and the UK, the challenge is clearly to develop their policy settings and build their internal consensus regarding national goals and aspirations or we risk joining the US in hyper-partisanship.
Our choices regarding the role of government and the level of support we should expect for industry development, investment assistance, and skills formation will be relevant to investment outcomes. Globally, the requirement for higher productivity has never been clearer, but our productivity outcomes are amongst our weakest since measurement began. Our ability to maintain independent policies regarding education and health is a classic example. Our unique tertiary education and universal healthcare models may be our competitive advantages over the next 30 years, but we must commit to independent policies first.
The increasing role for government spending in Australia has never been clearer this week with the release of public sector wages growth. In the latest quarter, wages grew more than 8% year-on-year. These higher wages are in part driven by huge increase in public investment which boomed 12% year-on-year, mainly a policy response to surging population growth.
Australian Public sector wages bill
Source: ABS, Australian Government, State Government, Macrobond, UBS
China & US
On a more challenging front, Australia will need to respond to the higher tensions that are bound to exist between China and the US. Can democratic principles and the rule of law be supported internally in Australia without a call for allegiance to the US and the UK in the face of Chinese aggression?
The risk to iron ore sales and pricing remains elevated in all scenarios in which the China-US relationship is strained. This tension underpins part of our underweight position regarding future iron ore prices and exports.
Turning to stocks and markets. Interestingly, no comprehensive agenda sits behind Trump, although some trends are clear. We are also reminded that significant checks and balances (mainly deliberate roadblocks) sit between a US President and policy outcomes. Some features of a Trump presidency the market is anticipating include:
- Trump will cut taxes for wealthier Americans and corporations, which will be positive for companies, including portfolio positions Nanosonics and QBE.
- Trump has emphasised increasing tariffs, with proposals of 10% across the board and 60% on China.
- Geopolitically, Trump promises greater volatility and a less institutionalised approach: NATO to NAFTA, China and Russia-Ukraine.
Trump’s version of right-wing politics definitely does not include fiscal conservatism. The following chart outlines estimates of the impact of Trump’s spending plans versus Harris’ over the next 10 years. The continued increase in outlays will stoke higher levels of inflation and support materials and gold prices.
Source: CRFB; Macquarie Global Strategy
Higher global inflation and aggressive global government spending in Europe and China provide a critical backdrop for the Australian market. Given our commodity exposure, we prefer stronger global demand and rising nominal prices. Lower real interest rates (interest rates less inflation) and support for our budget deficits through a strong Australian government bond market also mitigate the impact of our record levels of household debt.
The combination of global demand, lower rates, and higher government spending is a powerful force over the medium term, supporting equities, especially relative to cash.
In Australia, the direct impact of the Trump victory impact is more mixed, with risks relating to China higher. US policy regarding China, and the Chinese response to any actions – including but not limited to Taiwan, regional aggression, tariffs, environmental controls and influence in the rest of the world will all be critical.
In terms of monetary policy, the US election had little impact on our rate expectations as shown in the chart below.
Source : Company Reports
With almost no change to interest rate expectations in Australia and rising bond yields in the US, the interest rate differential has widened. All else held equal, this would likely see the USD appreciate and the AUD/USD exchange rate fall. This is exactly what has occurred, with the AUDUSD exchange rate falling by almost 1 percent.
Rising long-term US rate expectations, despite the Federal Reserve cutting short-term rates in the wake of the election, provide the RBA with additional cover to delay any rate change. As expected, the Cup Day RBA meeting produced no changes in the cash rate, so all eyes are now on February. A raft of high-frequency data, including Christmas retail sales, will be considered prior to this meeting.
Stock reactions
We have taken some stock positions specifically for Trump’s return, including BlueScope Steel (ASX:BSL). Rising nationalism and higher tariffs are expected. This is especially powerful for US steel producers. BlueScope Steel has extensive assets in the US that would benefit from higher tariffs.
We anticipated that the outlook for energy development would also appreciate a Trump victory. Worley Limited has been quite weak through FY-25, but saw a strong bounce since Tuesday.
We anticipate the backdrop will remain positive for industrial commodities, and expect small caps to outperform large caps. Higher interest rates, especially in the long-term are positive for QBE and the stock rallied appreciably in the wake of the result.
More generally
The clear message about Trump is that there will be unpredictability. Whether there will be more or less than last time remains to be seen. But history suggests that Trump’s underlying decision-making process is unlikely to change.
The investment management approach, therefore, is not to put a tight framework around his stated policies. Those policies are more of a ‘vibe’.
Sensible investors will remain diversified, and will resist the temptation to take large positions.
The information in this article is of a general nature and does not take into consideration your personal objectives, financial situation or needs. Before acting on any of this information, you should consider whether it is appropriate for your personal circumstances and seek personal financial advice.