While the US election uncertainty may finally be behind us, whether and how pre-election rhetoric will ultimately be reflected in policy shifts remains unknown. With Donald Trump emerging as the winner of the presidential race, the markets are now casting their vote on what this outcome means. Stephen H. Dover, chief investment officer of the Templeton Emerging Markets and Franklin Local Asset Management groups, sees higher volatility, the possibility of more protectionist trade policies—which could have negative effects on the US economy—but also the potential for stimulus resulting from tax cuts and increased fiscal spending which could provide an offset. Here, he examines these and other global market implications from a changing US administration.

While US election uncertainty may be finally behind us, the economic consequences of a Donald Trump presidency will not be entirely clear until we are in a position to differentiate between campaign promises and real policy action. In the meantime, we would expect equity markets broadly to remain volatile on heightened uncertainties including in the key area of trade policy and the future composition of the Federal Open Market Committee. A large focal point of Trump’s domestic campaign promises had centered on looser fiscal policy built on infrastructure spending and job creation, which could serve as a boost to global demand. More concerning, however, would be a move toward trade protectionism, although we think it seems likely Trump will shift away from some of the more extreme policies he proposed in this area. Insofar as such policies are enacted, we think a shift away from a rules-based trade regime will likely have broader knock-on effects globally. Here are a few of the main general risks we see affecting the United States and other countries globally:

  • Rising risk premium on the back of policy uncertainty; markets may face bouts of optimism and pessimism
  • More protectionist trade policy likely, but potentially offset by tax-cut stimulus and increased fiscal spending
  • Exporters to the United States are likely to face headwinds from increased protectionism
  • More controls on immigration and movement of people
  • Less support for current defense and security arrangements (which potentially would have significant implications for countries such as Japan, South Korea and Taiwan)

Potential US Growth Supporters

Given the Republican Party’s pre-election focus on a pro-growth policy, more unified executive and legislative branches in the United States should increase the likelihood of meaningful fiscal stimulus, along with reflation. Growing populism in the United States should also see increased public-sector involvement in infrastructure projects and other forms of spending, in our view. Hence, we think it is now more likely the US government will embark on more aggressive spending after experiencing contractionary fiscal policy for much of the past eight years. Admittedly, it remains to be seen how this stimulus will be paid for and what the implications will be for the deficit. This expansionary fiscal policy would likely boost inflation in the United States, which we think could be positive for certain investments.

  • Rising inflation could cause a shift from bonds to stocks as policy rates finally begin to rise from zero and as the long end of the US Treasury yield curve may begin to price in more inflation risk.
  • Rising inflation would likely be positive for cyclical stocks in particular, including those tied to infrastructure plays, banks and hard commodities.
  • Repatriation of US corporate profits earned abroad could boost sentiment, which could have a positive impact on many multinational companies and markets overall—but could bring negative implications for other countries currently acting as a tax haven.