What Trump's Presidency Means For The Global Investor

The White House ()

The White House ()

Contrary to initial skepticism among the investors following the recent U.S. elections, the stock markets have remained steadfast. However, speculations are still on about how things will shape up as Trump formally takes over as the 45th President of the United States.

Donald Trump’s economic plan, so far, is focused on revitalizing the U.S. economy and creating millions of additional jobs by pushing infrastructure investing, tax and regulatory reforms, and downsizing the trade deficit. During his victory speech, Trump had said, “We will double our growth and have the strongest economy anywhere in the world.” The market responded by pushing the S&P 500, Nasdaq, and Dow indexes to record highs.

Trump is looking to boost the U.S. GDP to 3% per year on average, with an ambitious aim to touch 4% while creating 25 million jobs over the next decade. Trump plans to rebuild the nation’s infrastructure which would employ millions of Americans. A whopping $1 trillion will be pumped into infrastructure to fill the “ten-year funding gap” estimated by the National Association of Manufacturers (NAM).

Trump also plans to trim the federal corporate tax rate on businesses and remove the restrictive regulations in key sectors such as banking and energy. He has shown a dislike for the post-recession financial regulation Dodd-Frank by calling it “a very negative force” and is expected to repeal most of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Notably, the S&P Banks Select Industry Index is up 22% since the election results.

Trump’s deregulation strategy would reduce the current regulatory burden by a minimum of $200 billion annually, according to a report. When further combined with a proposed lower tax at 15%, this could add billions to post-tax earnings for corporations.

A lower corporate tax rate could work as an incentive to re-shore and on-shore investment by businesses, thereby limiting out-bound FDI (foreign direct investment). Trump plans to provide a deemed repatriation of corporate profits held offshore at a one-time tax rate of 10%, in the hopes of encouraging companies to bring back trillions to American soil.

Trump’s aggressive stance on trade treaties has triggered worries about a trade war; some of the consistent themes in his various assertions have been to impose tariffs as high as 45% on China as a penalty for its currency manipulations and unfair trade practices, renegotiating tax-treaties such as NAFTA that gives Mexico tariff-free access to the U.S. markets and the Trans-Pacific Partnership (TPP) agreement.

The U.S. had a trade deficit of 319.28 billion in goods in 2016 with China, which puts U.S in a powerful place to negotiate the terms of trade; however, it would not be without casualties. Chinese President Xi Jinping during his address at Davos said, “No one would emerge as a winner in a global trade war,” which does reflect China’s practical (and slightly worried) approach on the issue.

According to the Section 122 of the Trade Act of 1974, the U.S. President can only levy a temporary import surcharge, not exceeding 15% for a period not exceeding 150 days (unless extended by Act of Congress) to correct a serious balance-of-payment situation. Thus, a tariff of more than 15% would be a long-drawn process.

In times of interwoven international relations and trade ties, it is not possible for any country to set the terms of trade completely in their favor. As Newton said, “For every action, there is an equal and opposite reaction.” Thus, Trump will have to weigh the consequences of any trade actions well before implementing them. That said, it is likely that there will be some changes in trade policies, though perhaps not as extreme as Trump has promised.

The best recourse for global investors in the backdrop of his 'vocal chaos' is to look at fundamentals of the U.S. economy and stocks while investing, rather than paying attention to the constant stream of breaking news and Trump’s 140 letter tweets. The U.S. economy is primarily consumption driven and earns only 12.6% of its GDP via export of goods and services (vis-à-vis 22% in case of China).

After seven quarters of sub-3% growth, the U.S. economy is back on track with a 3.5% growth during Q32016, and with Trump’s intentions to keep interest rates low, increase public spending, and lighten the regulatory and tax burden, economic growth should consolidate in the times ahead.

Final Word

Trump’s economic plans, especially revision of tax rates, regulations, and spending to spur the economy, have been taken well by the markets so far. However, the road to implementation will be in focus in the coming days. As an investor, it is best to learn how not to react to Donald Trump’s sharp and impulsive style that have been causing jitters about his eco-political stance as the President, and instead focus on the bigger picture, which is how he'll implement his stated goal of making American great again.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Prableen Bajpai

Prableen Bajpai is the founder of FinFix Research and Analytics which is an all women financial research and wealth management firm. She holds a bachelor (honours) and master’s degree in economics with a major in econometrics and macroeconomics. Prableen is a Chartered Financial Analyst (CFA, ICFAI) and a CFP®.

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