BACKGROUND

Donald Trump has been elected the 45th US President. The Republican candidate entered the race as an underdog; Hillary Clinton, the Democratic candidate has been heavily favoured to win. Donald Trump will be sworn in on 20 January 2017.

Republicans retains control of both chambers of Congress. Republicans retain their majority in the House of Representative and the Senate. The party campaigned against immigration reforms, public healthcare, gun control and further financial regulation. With both the Presidency and Congress under Republican, the vacant seat for the Supreme Court justice will likely be filled by a Republican-nominated candidate.

Implications to US Growth

Electoral upset upends market forecasts. Prior to the election results, the markets has priced in a Clinton victory. Market correction has been massive in the immediate aftermath of Trump’s victory as flight to safety sees increased attractiveness in Treasury, gold, CHF and JPY over of riskier asset classes (including the emerging market portfolio).

In the near-term, we expect market selloffs to moderate but sentiments to remain bearish, as markets digest the news of a Trump presidency.

Trump’s platform short on details; long on rhetoric. Trump’s victory introduces huge uncertainties in outlook, especially given his vague policy direction. High uncertainties, particularly with regards to the regulatory and policy stance will likely weigh against growth. Furthermore, we believe that businesses will likely delay investments until Trump’s policy priorities and governing style becomes clear.

America first; anti-trade sentiments to dominate. Trump represents the growing anti-trade and insular elements of populist sentiments. He pledged a more protectionist stance against US trading partners, particularly with China, possibly renegotiating the terms of various trade deals. He is opposed to the TransPacific Partnership Agreement (a stance shared with his Democrat rival) and will likely scuttle the deal during his presidency. Also on his radar is the NAFTA though we believe that dismantling the three-country accord of more than two decades would be something that can be undone easily.

Tax cuts for the high income earners; some fiscal stimulus expected. Despite being short on details, taxation has been a key focus on Trump’s fiscal plans. Trump’s platform has argued for the simplification of the tax code and across-the-board cuts in taxes, especially for wealthy and high income earners. This is further supplemented by lower corporate tax rates, with incentives for businesses repatriating profits held overseas.

Assuming that Trump follows through on this platform, we expect a modest multiplier effect from the tax cuts and infrastructure spending to kick in, as soon as late 2017 or early 2018, cushioning (but not reversing) an expected economic down cycle during the period. The uptake on incentives to repatriate overseas profit may be lukewarm assuming investors adopt a more cautious approach before there are clarity on Trump’s policy priorities and governing style.

Budget deficit to increase; debt to nudge higher. US fiscal deficit is expected to widen and government debt financing is expected to increase over the course of the Trump presidency. Expected expenditure cuts from the repeal of various social discretionary spending – notably the Affordable Healthcare Act – will be largely offset by increased defence and infrastructure expenditure. We are pessimistic that the higher deficit will be offset by higher economic growth or any related multiplier effects.

Uncertainties on a Fed rate hike. Odds of a December rate hike declined to sub-50% levels, highlighting the increased uncertainties (implied by overnight indexed swaps) brought by a Trump presidency. If asset prices continues to fall in response to the policy uncertainty, the Federal Reserve may be forced to delay the next policy interest rate hike. However, as markets digest the news, we expect the federal fund rate to increase by 25 basis points as calmer nerves prevail. A further delay in interest rate hikes may adversely affect the Fed’s credibility and more importantly the ability to better handle future economic downturns.

Implications to Malaysia

Flight to safety and its implications to Malaysia. As an emerging market, Trump’s unexpected victory sent the KLCI down 1.0% or 16.2 points in its immediate aftermath. The MYR has likewise depreciated against the USD from USDMYR 4.2017 to USDMYR 4.2352 as investors’ risk appetite declines. Bearish sentiments will likely linger, particularly on riskier asset classes. Higher outflow of foreign funds may be expected in the near term though Malaysia’s relative strength may place it better positioned than many other emerging market economies.

Growth outlook negative; anti-trade sentiments to weaken external sector. Assuming that Trump’s antitrade rhetoric translates to policy, the real impact on Malaysia’s export sector would likely be felt next year. These sentiments would limit potential upsides from an expected recovery in external demand and the manufacturing sector in 2017. Continued weaknesses in Malaysia’s external sector may place further constraints on domestic demand as a driver of economic growth. This may weigh down on potential growth upside and drag down GDP growth towards the lower end of the official forecast of 4.0%-5.0% next year.

Defence arrangements under threat. An offshoot of Trump’ insular “America first” pivot, Trump has indicated that a renegotiation of existing defence treaties between the US and its traditional allies is on the cards. Trump’s “rebalancing of financial commitments” may shake up existing security arrangements. At its worst, this may play out as a significant reduction of US presence in East Asia, increasing vulnerabilities to piracy in the South China Seas, potentially emboldening China to play a more assertive role in the region. Alternatively, Malaysia may be obliged to contribute significantly to defence costs. That said, this is one of the fewer areas where policies remain severely “short on details and long on rhetoric” and as such, it is difficult to assess the extent of Trump’s pivot with regards to security arrangements.

A more cautious monetary policy. On the balance of probabilities, we believe that the OPR is likely to be retained at 3.00% on the assumption that BNM would adopt a wait-and-see approach before deciding to cut the OPR. At the core of the issue, the decision to cut or maintain the OPR hinges upon the dilemma between the competing goals of maintaining monetary and financial stability and supporting growth from heightened uncertainties. While subdued inflation offers BNM some elbow room in cutting the OPR, we believe that BNM is unlikely to exercise this option, opting instead to adopt a wait-and-see approach as the full impact of the rhetoric play out.

Conclusion

Trump’s broad strokes on policies a source of uncertainties. Vague and oftentimes contradicting statements from the Trump campaign introduces a high degree of uncertainties which will likely be a drag on growth, both domestically and globally. The lack of a coherent policy framework complicates any attempt to evaluate the impact of a Trump presidency, beyond introducing uncertainties, a net negative for growth. The coming weeks before his presidency will be crucial. Depending on Trump’s articulation and detail of his future policies, Trump may be able to mitigate some measure of uncertainties though negative sentiments will likely linger.

Trump’s rhetoric a cause for cautious outlook. Notwithstanding clear details, Trump’s insular rhetoric has been poorly received by the market. Sentiments post-election has been overwhelmingly negative with investors adopting a more defensive approach. Assuming a translation from rhetoric to policy, particularly his inward-looking philosophy, we believe that a Trump presidency will exacerbate vulnerabilities in the American economy and place a drag on global growth. For now, let us wait and see.

Source: Kenanga Research - 10 Nov 2016