The punditry not only greatly underestimated the presidential chances of Donald Trump, they also misread the implications of the known election outcomes for the financial markets. Far from the predicted rush for safety in the US dollar, US Treasuries and defensive stocks, the market, when given the opportunity, pushed US bond yields higher, indicating that faster growth and more inflation was to be expected post Trump (the 10 year Treasury yield initially increased from 1.85% to 2.08%, though it closed at 2%).
Further evidence of positive expectations of faster growth came with the outperformance of resource companies, including those listed on the JSE. The performance of the 12 sectors that make up the S&P 500 is shown below. Financials and Healthcare (expected to benefit from less obtrusive regulation and executive action) as well as Materials ( to benefit from growth and investment in infrastructure) were outperformers while sectors that offered protection against a weaker economy, including Consumer Discretionary and Staples underperformed as did interest rate sensitive sectors of the New York stock market.
These outcomes must be regarded as satisfactory for EM financial markets, including those measured in rands. The exchange value of the rand has held up more than well enough to sustain a forecast of lower inflation and interest rates to come- essential for faster growth in SA.
What the pundits missed is that while Hillary Clinton represented business as usual for the US and its allies, business as usual under Obama had become increasingly less friendly to business. US and global business have come under increasing suspicion and hostility from more ambitious and obstructive officials emboldened with ever greater executive powers. The Trump administration, with the aid of a friendly Congress, could achieve some quick wins for US business by annulling or at least amending financial and environmental legislation and practice, as Trump had promised to do. The grossly dysfunctional US corporate tax system is an obvious target for a complete restructuring in ways that would be helpful to the owners of business in general and to the economy at large – though these are not necessarily synonymous.
Free trade for example (against which Trump argued and which helped him bring in the vote on the rust belt) is very good for consumers and their standard of living. Cheaper and better air conditioners produced in China have made living in the US South a lot more comfortable, for example. But they have not been helpful to the owners of air conditioning factories in the US or to the employment benefits of their employees. Protection unfortunately can be good politics and good for business owners, but not necessarily for their customers. Though if free traders are seeking consolation they may find it in the prospect of freer trade in services, with a far larger role in the economy (including the SA economy) than manufacturers. Exchanges conducted not over the waters but over the internet and are much more difficult to tax.
The Trump triumph, it should be appreciated, represents a successful attack on the conventional wisdoms and actions that have guided social and economic policies in the US and Europe. How wise and fair this consensus actually is, is a matter of very divided opinion as the US election has demonstrated. Given the opportunity provided by the highly unorthodox Trump, large numbers of Americans voted in effect against the comforts of the ruling establishments inside and their supporters outside Washington DC. Their discomfort in recent events is understandable and clearly geo-political risks are enhanced. Perhaps even the risks to the environment have increased. But the risks to doing business in the US and its growth prospects have as clearly declined, as the market has told us. 10 November 2016