Trump in the White House

Trump in the White House will cause a spike in risk aversion, obviously.. But the 2017 Asian outlook will be determined by slow moving economic cycles more than the personality of the president. We see a split between the short term and the long term reaction.

1. A sharp spike in risk aversion in markets is inevitable as there is no precedent for a Trump presidency and what we know of his personality as a candidate is discouraging. That spike will be associated with:
   • A sharp selloff in risk assets, yield curves will flatten rate expectations for the US fall.
   • The USD will weaken versus other developed economy currencies.
   • A sharp selloff in Latin American currencies. As Latam is seen as the first stress point in Trump’s “pro-American jobs” focus. This is negative for a world trade recovery as Latam purchasing power is important for world growth.
   • Weakness in Asian markets to the extent that they are a) higher risk than developed market assets b) seen as victims of Trump protectionism c) require world trade growth to recover. Inwardly driven economies should be favoured, ie India, Indonesia and China.
   • But note that (unlike LACI) the correlation between ADXY and Trump polling has been weak. The CNY provides an automatic offset: if USD goes down vs large developed currencies then the CNY is fixed higher against the USD as part of the crawling peg framework. This provides a firebreak for other Asian currencies.
2. Longer term developments are less clear but also less discouraging.
   After the shock investors should refocus on where the US economy and the world economy are on their respective trade cycles. In aggregate this will prove more important.
   • We do not expect that the election of Trump (with a strengthened Republican party in the House and Senate) will break US growth.
     • Sentiment among Democrats will be weak, but there are fewer of them than Trump supporters (!). The net impact on household confidence and activity will be muted (this is one thing we missed in Brexit).
     • Trump remains committed to upgrading US infrastructure (a key feature of his victory speech). This should be growth positive, though implementation lags mean that day 1 impact will be small.
     • The 3Q GDP data indicated that the contraction in non-residential investment that weakened 1H16 has come to an end, the labour market remains good and there may be a multi quarter boost from inventories (and perhaps stronger exports) into 2017.
     • My forecast of around 2% US growth in 2017 remains unchanged. This will take unemployment well below 5% and lead to more significant nominal wage growth.
   • We do not expect that the growth cycles in other developed economies will be broken by the election of Trump.
     • Japan’s incremental growth will be increasingly driven by the fiscal program announced in August.
     • Europe is an inward-looking economy though sentiment is possibly fragile and
     • EUR gains versus the USD will exert some small downward pressure on EZ inflation. EZ inflation was already a long way from the ECB’s inflation target. EUR gains mean that (residual) fears of ECB tightening in March 2017 will disappear.
   • A forecast of improving commodity prices and therefore a recovery in emerging market demand for manufactures remains in place.
     • Oil prices are being driven by the reduction in supply as investment is being curtailed. The increased probability of OPEC restraining supply is symptom that insiders see the supply/demand balance in the oil market as having shifted.
     • Food prices have been rising. We expect this to continue.
     • Infrastructure spending in America should be positive for sentiment. Continued focus from Xi on keeping growth robust in China will be positive for industrial commodities.
     • The short-run Trump impact on Latin American currencies will be negative. But big EM currency bellwethers – most obviously BRL are commodity not Trump correlated.

   There will be inevitable market concern about protectionism. This has been one of the highest profile parts of his campaign rhetoric.

   • In the 2017 outlook for global trade where we are on the cycle (see above) is more important for most countries. Unless global growth indicators weaken 2017 should be a stronger export (and commodity price) year than 2016 whether or not trade negotiation becomes more difficult.
   • There will be specific winners and losers. TPP is now defunct, Vietnam and Malaysia were the biggest beneficiaries and these countries will be the biggest losers.
   • For investors rotation out of large inwardly driven Asian markets like India and China into Latin America now looks less attractive.
   • China-US trade negotiations will become more problematic – it will be interesting to see whether the Chinese preference for a “pragmatic businessman” is delivered.
   • However I do not expect tariff walls to be introduced that would interfere with the majority of Chinese (or aggregate Asian) exports.
     • There’s no mileage in tariffs on a broad range of consumer goods (all the consumer sees is a more expensive shirt, shoes, phone, etc).
     • Increasingly Asian exports are going to other Emerging Markets rather than the US.

   Geopolitics will also be changed by Trump. He has criticised other countries for “freeloading” under US military umbrella. In Asia we expect that this means that:

   • US presence in the Pacific will be reduced. The accepted security of relying on the US to provide a check on China’s territorial claims will be reduced.
   • This implies that countries may start increasing focus on increased expenditure on defence:
   • Japan
   • Korea
   • Taiwan
   • Philippines(???)
   • The same force argues in favour of strong decisive leadership. It makes
   • Duterte more powerful
   • The Korean president more lame duck
   • Abe potentially more powerful(?)
   • An even more powerful Xi.

   When the Brexit vote was counted one journalist said that it was an example of “The elite telling the uneducated what to do and the uneducated telling them to **** off”. Trump is the same:

   • Populist leaders and parties will be empowered by this. The outsider can win.
   • The event risk generated by this is most acute for the Eurozone and extend out into the foreseeable future.
   • Mainstream policymakers will be panicking about how to stop the populist trend. It argues for higher government spending (both transfers and infra) and more focus on boosting growth. In aggregate this will push all countries more towards fiscal policy and away from asset-inflationary monetary policy.
   • This includes China. Reinforcing Xi’s focus on growth means less chance of a significant rebalancing.

   Trump has been critical of Janet Yellen and said that he will not reappoint her at the end of her term of office in February 2018.

   • The replacement does not have to come from the Fed. We don’t know who Trump’s shortlist would include.
   • We do not expect Yellen to resign as that would be an abrogation of responsibility from a technocrat. If she does Stan Fischer would likely take over as interim president. Who would be hawkish.
   • The broader pro-fiscal tone suggests that in the reminder of this cycle US rates (and therefore global liquidity) will be tighter than they have been so far.
   • In the next US downturn however we believe that a Trump presidency (and a Trump appointed Fed chair) will be more willing to embrace extreme policies such as the monetary financing of fiscal deficits.