Trump victory casts shadow of uncertainty over global investment

Shares and currencies have fluctuated wildly in the wake of Donald Trump’s unexpected victory in the US presidential elections on November 8. This volatility reflects the fears surrounding the president-elect, whose campaign suggested a restructuring of the US and global economy in numerous ways.

The day after the election saw a sharp rise in bond sell-offs in Asia, Europe and the US. The FTSE 100 fell 2%, the Nikkei 225 fell 5.4%, and the Mexican peso fell to its lowest level in two decades because the country seems the most threatened by Mr Trump’s presidency. Conversely, money poured into safe-haven assets such as the Japanese yen, and sectors that seem likely to benefit from Mr Trump’s policies, such as pharmaceuticals and defence.

But November 10 saw the US market open in record-breaking territory, European markets climb 1% and the Nikkei 225 soar 6.7%. As derivatives dealer CMC Markets noted, this rebound reflects the hope that Mr Trump is pro-business and that his election campaign “was a sales pitch rather than a commitment to act”, as his conciliatory victory speech suggested. Nonetheless, fears prevail, hence the divergence of stocks sales into ‘safe’ assets.

Stimulus package

Mr Trump’s promise to cut taxes, increase infrastructure spending and ease financial regulation might boost the US economy, at least in the short term, say commentators such as David Stubbs, global market strategist at JPMorgan. This stimulus could boost employment, investment funds and the ease of doing business, at a cost of rising inflation and debt. Ironically, the latter would increase the US’s reliance on foreign investors, who fund chunks of its debt.

Reducing corporate tax, from 35% to 15%, could discourage outward FDI because US companies deem it cheaper to invest at home. This would be particularly damaging for countries such as Ireland which rely on the allure of their low taxes. However, decreased tax and, therefore increased profits for investment, might mean the very opposite for the US’s outward FDI

Appetite for investment could also increase after Mr Trump’s one-off 10% repatriation tax on $2600bn of foreign profits, from which US multinationals and the government would benefit. Currently, repatriation is at a steep 35%, leading companies to store their money abroad. This new tax may augment, in particular, domestic M&A, especially if Trump encourages more ‘national champions’. Select USA, the national investment promotion agency, ignored repeated requests by fDi for comment. 

The shadow of protectionism

Ironically, it was most disconcerting when Mr Trump told the world “has nothing to fear” two days before the election. In particular, Mr Trump’s anti-trade and anti-globalisation rhetoric has shocked many. His election campaign suggested an overturning of the global financial order in which the US has a prime position, and a return to isolationism.

Rather than a system based on openness, Mr Trump has promised to build walls, literally, place massive tariffs on Mexican and Chinese imports, limit immigration and renegotiate or dissolve existing and potential international trade agreements, such as NAFTA, TPP and TTIP. Nor did NATO or the WTO escape his criticism.

Mr Trump claims he wants to “put America first” because he believes globalisation has pushed it to second and, through outsourcing, cost the US manufacturing jobs. While this is partially true, critics argue that FDI’s benefits outweigh its costs, and that it “plays a critical role in America’s manufacturing sector, providing US workers four million [quality] jobs with good pay”, as Aaron Brickman, senior vice president of the Organization for International Investment, told fDi. Rich Turner, president of one of the US’s last denim manufacturing plants, Mount Vernon Mills, says simply: “Without NAFTA, we’d be bust.”

Talking to fDi, International Economic Development Council CEO Jeff Finkle said that if Mr Trump “slows the exportation of jobs out of the US, there could be a slowing of outward FDI. International companies desiring to sell in the US should probably consider US-based manufacturing operations in Mr Trump’s world.”  

Many have warned that a protectionist trade policy could have negative consequences for the global economy and lead to a self-defeating tariff war. On the other hand, right-wing leaders across Europe have lauded Mr Trump’s isolationism. His hazy foreign policy, especially regarding Russian president Vladimir Putin, adds another layer of uncertainty.

Mr Trump has threatened to slap import tariffs of 35% and 45% respectively on Mexican and Chinese imports. Such protectionism would devastate emerging markets “who are extremely trade-sensitive” and reliant on US trade, says Mr Stubbs from JPMorgan. Alienating key trading partners and sources of FDI, such as China, would also cost the US. Six million US jobs depend on trade with Mexico, according to CNN Money. The US would lose out as large exporters look elsewhere, a potential boon for Europe.

TTIP RIP?

Global law firm Dechert said in a post-election statement that Mr Trump is “pro-international trade” and simply wants “a reset on both the TPP and NAFTA”. However, “the TTIP is history”, says Bernd Lange, chairman of the European Parliament’s Committee on International Trade. On the upside, US protectionism may influence a soft Brexit as the UK looks to secure trade. However, the reverse could be true because Mr Trump has made comments about prioritising the UK’s trade. 

Mr Trump’s immigration restrictions would decrease the US’s talent pool, number of consumers and openness, increase wages and therefore inflation, and “only benefit some [while being] bad for most corporations”, says John McLaren, professor of economics at the University of Virginia. Subsequently, this may damage FDI into the US while increasing outward FDI. However, Mr Trump's supporters say he wants more legal immigration.

All of the above is speculation. “It’s too early to know the impact,” says European Commissioner for Trade Cecilia Malmström. As with Brexit, the uncertainty surrounding future policy will probably slow trade and FDI in the interim. However, many are betting that Mr Trump’s campaign bluster “will fade with no implementation…no wall will be built between Mexico and the US”, says Berenberg chief economist for the US, Mickey Levy.

Chief investment officer at Close Brothers Asset Management, Nancy Curtin, told fDi: “The next few months will be critical to restoring confidence. Keeping Paul Ryan would calm the market, [as would] the announcement of a strong Treasury Secretary. Respect for the independence of the Fed will also be critical to investors.”