What a Trump win would mean for the global markets

Traders fear another Brexit, only this will be more dramatic.

Whatever the opinion polls say about the US election, the signals from the sharemarket are not “too close to call” — rather Wall Street is voting with its wallet and calling a surprise Donald Trump victory next Tuesday.

Political commentators are warning of the turmoil a Trump victory might unleash and no less than 370 prominent economist have signed a letter condemning the Republican maverick.

But the more political elites try to direct the election, the more the market worries we are going to see another “Brexit”, though this vote could be much more dramatic.

Why are markets seriously betting Trump will take the prize?

As Barrons magazine put it this week, going back 88 years when stocks are down in the three months before a US election, the candidate challenging the incumbent usually triumphs. It has happened in 19 of the past 22 presidential elections.

This time, Wall Street is down about 4 per cent since August and has been generally weak through the later stages of the campaign.

That’s not a prediction — it’s a fact. Market traders work off hard numbers and ignoring all the polls and punditry, that scary statistic is the No 1 reason market’s are very nervous.

From that assumption, traders are working on the basis that Trump and his erratic policies will immediately trigger a stock sell- off in the US, which will almost certainly get copycat treatment on the Australian sharemarket.

The sting for Australian investors is that while the US market may well be due a pullback — it has sailed way above its pre-GFC high — the ASX has been drifting at the 5200 mark for no fewer than three years and would be pulling back from, well, not very much at all.

The S&P/ASX 200 has moved downwards by more than 1.2 per cent this year to date.

What can investors do?

For the most part, Australian investment leaders have been wise enough to say very little apart from platitudes concerning what might happen if Trump wins — words such as “volatility” and “uncertainty” abound.

The truth is that Trump is such a maverick, specific forecasts on points of policy are highly dangerous.

Trump may well reverse his positions on key issues at any time.

Simon Johnson, a former chief economist at the International Monetary Fund, says a Trump victory would “likely cause the stockmarket to crash and plunge the world into recession”.

Well, no one can accuse him of platitudes.

On a more sober front, ANZ has been pushing the defensive nature of its ETF (exchange trade fund) suite of products, while at the other end of the market, CFD provider IG Markets has unleashed a new marketing campaign around the theme that US election markets will always “offer opportunity”.

Separately, David Bryant, head of Australian Unity Investments, warns that as the election looms over markets, investors still have to get diversification in a low-cash environment.

“It means keeping an appropriate position in secure, but ­currently low interest-producing, fixed interest investments while spreading investments across a number of other asset classes including domestic and inter­national shares and property,” he says.

What will change?

Looking to the longer term, here are some aspects to a Trump win that we could be considered as highly possible scenarios, and in no particular order:

1. The US dollar would almost certainly rise as traders expect the US economy to receive a short- term boost from tax cuts and protectionist policies.

This means the Australian dollar would fall. Commonwealth Bank has suggested a fall of 10 per cent.
2. American interest rates and bond yields would ultimately lift, and lift faster, if Trump were to push through his promise to bring rates back to “normal”.
3. Trump tax cuts would offer a sugar hit to US-listed companies in the form of higher profits.
4. US trade partners, particularly China, will struggle if the world’s biggest economy begins to put up barriers to free trade.

In turn, emerging markets across Asia that are closely linked to China’s fortunes will also struggle.

If — and it is still a big if — Trump wins, the sharemarket would be the liveliest we have seen it in many years.

For investors, that is something they can deal with. As for the wider world, that’s another question altogether.