The inauguration of the next leader of the free world is upon us – and the result is far from certain. I took an informal lunch time poll of about 25 industrial agents and occupiers last week, among whom 57% thought Hillary would clinch the deal with the electorate and 43% Trump.
Personally, I think Trump will win an outright majority of US voters, but will lose due to the state by state electoral system. I’m not about to bet the house on it, though. So, let’s consider the possible consequences of both scenarios.
A Trump win would immediately result in financial volatility. There would be significant capital flight/redirection of new investment away from US to other safe havens, including UK. So, there would be more money chasing UK real estate and also pushing UK gilts down again.
Longer-term, anti-globalisation and increased US isolationism, assuming Trump can push this agenda forward, would mean disruptions to the international political status quo, hence the possibility of opportunistic and worrying new alliances (read increased global political uncertainty). Again, this would drive capital flows to the usual safe places.
US international disengagement might also mean US multinationals reducing foreign exposures, possibly encouraged by new favourable cash repatriation tax allowances in the US linked with incentives to invest the sums in the US or redistribute the largesse to US shareholders.
Impact of isolationism
US non-financial companies hold almost $2 trillion in cash on their overseas balance sheets, deterred by a 35% corporate US tax rate. Trump has already mentioned a special concessionary rate of 15% to bring the capital home, but it would no doubt come with conditions.
The implications for New York’s financial services are also worrying, at least for New Yorkers. NYC may prove increasingly less welcoming to both non-US banks seeking to re-locate in the wake of Brexit as well as US banks reshoring international activities.
The city could lose financial players should the domestic environment turn against non-US activities. Would isolationism mean reigning in US regulatory extraterritoriality? This alone would make other global financial centres look infinitely more appealing. Big movements could follow.
In short, a Trump win could make Brexit look like a ‘ripple in a tea cup’ to misquote a hackneyed phrase.
A Hillary win, in theory, should result in less financial volatility, but business as usual? Not quite. She will be hounded while in office and subject to relentless threats of investigations leaving less time to pursue her agenda (whatever that is).
A new version of legislative gridlock. At best a one-term president, which means her potential congressional supporters will be busier jockeying for position for the next election in four years’ time than pushing forward her legislation. This does not sound like a recipe for progress.
An isolationist theme can be traced here too. Trade agreements also look dead under Hillary, certainly the TTIP EU-US trade deal and Trans Pacific deal look unlikely to be agreed, let alone ratified, but perhaps a more moderate form of economic isolationism with less pressure on the US international business sector. NYC is safe and the bankers will sleep well at night. Well of course there are the geopolitics to think about and US power projections.
Let’s just conclude by suggesting that markets will over-react to either outcome, that what markets do. But after a period when either candidate demonstrates the limits of their ability to shape events, moderation will prevail. Bring on the election!