Brace yourselves for some lively changes

Investors must now brace for the most lively — and potentially damaging — period markets have faced since the GFC.

People take in the Japanese market’s reaction to the US election results outside a securities firm in Tokyo yesterday.

Investors must now brace for the most lively — and potentially damaging — period markets have faced since the GFC.

The first impact of a potential Donald Trump win was made very clear yesterday with a powerful drop of almost 4 per cent at one stage on the local stock exchange as it became clear Hillary Clinton was not going to snatch victory across the swing states of the US.

Though political pollsters may have got the US election wrong, a Trump win has always been given a much higher chance by investors as opposed to political pollsters.

Buried under the US election data in recent weeks was one highly significant investment number — 19 times out of the past 22 presidential elections the challenger won if Wall Street fell in the three months before voting day. As US voting began earlier this week, Wall Street had fallen 4 per cent since August.

Analysts at Commonwealth Bank suggest the Australian dollar could drop as much as 10 per cent if Trump wins outright: Trump’s aggressive pro-US approach is expected to initially bolster the US economy.

Moreover, Trump’s outspoken calls for the US Federal Reserve to bring interest rates “back to normal” will mean that interest rates in the US will almost certainly push higher — this is also expected to lift the US dollar higher against all currencies.

Earlier yesterday, the Australian dollar reflected the changing outlook: it hit a six-month high of US77.71c in early trading and then fell sharply as the day progressed, dropping to US76.6c in the late afternoon.

The rhetoric from Trump clearly suggests a much harder line from the US on China in relation to trade and economic agreements — a move that would not be in the interests of Australia since China is our key trading partners.

Local investors have a double exposure to the US election.

• Australian shares and interest rates are highly sensitive to movements in the US.

• Separately, many Australian investors now have direct holdings in US markets through online shares, index funds and ETFs (exchange traded funds).

Though gold — a traditional safe harbour for investors in times of crisis — did not show significant movement over the past weeks, it was clearly moving higher yesterday, gaining 3 per cent in New York to $US1307 an ounce.

On the ASX, the All Ordinaries Gold Index gained more than 1 per cent while the S&P/ASX 200 closed down 2 per cent at 5156.6.

Elsewhere, Trump’s aggressive — through erratic — policies should specifically offer a boost to US-based listed companies that would benefit from US tax cuts. He has called for personal and corporate tax cuts — in contrast Clinton had planned to lift personal taxes for the wealthiest — including a 4 per cent surcharge on those earning more than $US5m a year.

Once the initial drama of the election outcome settles, investors all over the world are likely to become more aware of a change in tack within the US government. Crucial in this new regime will be less enthusiasm for free trade — neither Trump nor Clinton were in favour of the TPP Trans Pacific Trade Agreement.