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Tuesday, November 22, 2016

Trumponomics 2017-2020

The election is going to have significant long-term consequences for US policies beyond its own borders. Expect the development of new policies in opposite end of the spectrum which should generally be less liberal than before to respond to Trump's core voters a.k.a middle class who were impacted by globalization. This piece is originally from The Edge November 7 2016 but is edited by me with my own thoughts. Let's think of two scenarios: Lite vs Full Trump. 

Lite: Reality sinks in and he must negotiate his measures with his fellow Republicans and forced to give up part of his original plan. Final proposals are more modest and neutral to the budget deficit. 
Full: He goes full steam ahead in the implementation of all if not nearly all of his campaign promises.

Impact on US economy
Lite: Slightly positive on US growth. No recession.
Full: US growth heading downwards. Expect a recession.

Impact on global economy
Lite: Global GDP growth to be approximately 3%. About 0.5% lower than initial estimates.
Full: Global GDP growth might be lower than 2% or minus if a recession occurs.

Impact on volatility of exchange rate/equities
Lite: Significant which we are feeling right now.
Full: Major. 

Impact on US monetary policy
Lite: No rate rise by fed in Dec 2016 as Dollar is too strong. Might have tightening in 2017 if reflation occurs due to his infrastructure spending plans.
Full: If US growth weakens or worse a recession, tightening will stop and QE4 would no doubt be considered.

Impact on US Treasury bonds
Lite: Increase in long term rates due to expectation of high deficits from his spending plans. Then a downturn.
Full: Same as above.

Impact on US equities
Lite: Selective sectors that benefits from his policies to go up as a knee jerk reaction. Others will go down particular technology sector.
Full: Defense, infrastructure and healthcare sectors to shine. Others no.
*Do not count on international strategies due to his closed door outlook but instead on purely domestic strategies and small-cap equities.

Impact on US dollar
Lite: Positive in short-medium term as investors flocks to long term bond yields that are more favorable.
Full: Negative if the US requires QE4 policy or if fiscal expansions plans are blocked by political gridlock.

Impact on gold
Lite: Purchase if the Dollar's strength means a weaker gold price. Buy if you hold USD physically. Not worth to convert Ringgit to USD as it merely offsets it.
Full: Purchase regardless if very certain of economic, geopolitical or financial stress.

Impact on emerging markets
Lite: Weakened at first by general uncertainty and by the rise of risk aversion.
Full: Weakened by increase in protectionist policies and risk aversion. Major trading nations to be impacted heavily such as China and Mexico.
*Russia might be the only exception since his "bromance" with Putin might result in the lift of US sanctions.

It's going to be a very interesting but at the same time nervous next four years for investors :) Trump is not going to be President just yet but he will on January 20th 2017. I would like to be wrong but until there is more certainty it is better to keep cash and wait for opportunities to present themselves. Signing off folks....

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