This US election update is written by Matt Vickers, principal adviser of Snowgum Financial Services. We provide commentary on how we expect markets to behave in a president elect Trump world and explore why the polls got it wrong again.
Pundits Trumped
Trump is the President-elect and he made it there on the back of middle-class white America. Why?
During the GFC, American middle-income and predominantly white men were hardest hit. Unlike Australia, where a mining investment boom offset employment loss in manufactoring and other sectors, the US went through a painful recession.
The eventual recovery, led by the technology sector, was a poor substitute at providing employment opportunity to low skilled workers. The wealth created from the technology industry sees wealth in the US more unevenly distributed than at any other time in history. Trump has strong appeal to a disenfranchised middle America, much of whom live in the manufacturing and industrial states of Wisconsin, Indiana, Michigan and Ohio, the swing states that delivered his victory.
Putting aside Trump’s significant personal, business and political flaws, his key ideological platform of being isolationist and fiscally profligate, which would “make America great again”, resonated clearly to middle America.
Closing borders to foreign trade to bring back the jobs and spending money on “lots and lots of infrastructure” (as stated in Trump’s victory speech) are his central platforms.
When Trump stood in the shadow of a Ford factory in Michigan and said he would “slap a 35% tax on any Mexican-made Ford cars sold in the US”, he connected with middle America, in spite of other outrageous comments.
Can trump deliver on his promise?
Much of the lower-skilled manufacturing jobs the US once exported are now automated and no longer exist. Building public infrastructure costs money, something the US government doesn’t have (and is even more difficult to achieve if Trump cuts taxes as promised). The impossibility of Trump’s platform has in no way diminished the highly intoxicating narrative for the disenfranchised middle America searching for an answer.
Meanwhile, high skilled manufacturing is booming. Robots, not foreigners are replacing US jobs and Americans are big builders of robots. Voting was split down educational not employment lines. White university educated voters abandoned Trump in droves. However, lower educated voters overwhelmingly flocked.
Trump’s rhetoric in his victory speech was perhaps the most positive sign for a neutral listener. He read of the teleprompter, attempted to preach unity and was gracious. If Trump can surround himself with excellent advisers, head their wisdom and refine his style of 'diplomacy', there may be a glimmer hope amongst an obscure political agenda.
Embarrassment drag - When polling gets it wrong
Twice in one year we learn a hard lesson. Polls, which are often accurate, can be completely wrong. What went wrong?
The answer we propose is human nature. People, in the privacy of a polling booth, will vote for a candidate/issue that they might otherwise be embarrassed to support in public.
The greater the embarrassment associated with supporting a candidate/issue, the more people will pretend to remain ‘undecided’ and in some instances, lie. This creates an embarrassment drag on polling data. The embarrassment drag is always associated with the least acceptable candidate/issue to the liberal intelligentsia; People will not openly support a candidate/issue for fear of being negatively judged.
US polling data had an unusually high amount of ‘undecided’ voters in the lead up to the election. The lion’s share of undecided voters fell in the Trump camp, indicating that more than a few had, for fear of embarrassment, avoided sharing their views with pollsters.
Interestingly, Republican run polls, as well as polls run by trump sympathetic polling groups, were far more accurate. The logic here, we are less likely to feel embarrassed if disclosing our views to a sympathising voice than one which may, even silently, judge us.
In future, polls addressing a divisive candidate/issue, which has a socially disdained potential outcome, need to factor an embarrassment drag on mainstream polling data.
Where to for US markets
Price to earnings (PE) ratios across the US market are at an eye watering 26 – this is exceptionally high and normalisation back to somewhere in the 15-20 range would usually be expected.
We say usually because there is no value in cash, a US markets normalisation will only occur if there is an increase in the Federal Reserve’s cash rate. Curiously, a Trump victory has created instability which likely delays the next Fed rate rise, this in turns buoys markets. This is a factor in the same level of pullback that the UK economy exhibited after BREXIT hasn't occured.
The key issue in the immediate future continues to be monetary policy management by the Federal Reserve.
Earnings growth for most US companies does not justify their high valuations in the US market. A further delay in raising Fed interest rates simply kicks the can down the road for an eventual normalising of US markets. The longer the can is kicked the stronger the potential drawback may need to be.
We feel a passive exposure to the US market continues to be a particularly unwise investment option. There are still pockets of opportunity in the US with a stand-out exposure been key technology stocks. By example, Alphabet, which has revenue growing at 20% per annum, is somehow still trading at a PE multiple of 18 vs. the much higher water mark of the rest of the market. Given continued growth in advertising revenue from Google and the markets continued awakening to digital advertising, some investments still make sense.
The impact on Europe
BREXIT has shown us that markets bounce back and quickly. The implications of a Trump victory are not so much economic, but political and social.
The Trump victory re-enforces the divide between a metropolitan elite, seeking to maintain a higher standard living and a greater swathe of middle class voters that have missed out on their share in the economic recovery.
Massive political change is now even more likely to occur in Europe.
- Marine Le Pen is a radical right wing politician in France. France is one more significant event from turning to her brand of politics in search of an answer.
- Geert Wilders has openly praised Trump’s success. He has been calling on a ban on Muslim’s people in the Netherlands.
- Angela Merkel is fighting sinking popularity with her more generous views on immigration a growing concern for many German Nationals.
- Stagnant incomes for middle class constituents in poorer economic European countries continue to drive discontent. A Trumps success is more likely to pave the way for a 'movement'.
- The EU may soon be fighting for existence if isolationist politicians exert greater control and a return of nationalism and isolationism emerges.
- Russia is thrilled with the outcome of the election…
What lies ahead for Australia
Australia has witnessed some of the discontent that led a silent majority of American voters to this landmark vote.
Our manufacturing industry, like that in the US, will never employ the same number of employees as it has in the past. Unlike the US, Australia benefited from a mining boom that provided employment opportunities to a large workforce. Industry growth that has employment as a key investment input has seen a lot of wealth flow back into a broader base of workers. This is vastly different from a technology boom in the US that has not created anywhere near the amount of employment jobs per capita of wealth created.
Australia’s superannuation system, significantly reducing dependency on welfare at older ages, has allowed the Australian government flexibility to proceed with a broader range of infrastructure programs and stimulus support than other developed economies that haven’t secured a way to fund retirement needs.
The biggest impact of a Trump presidency on Australia will be if isolationist policies result in a trade war emerging between China and the US.
President-elect Trump has previously promised a 45% tax on Chinese goods. Should this happen (or some version of this), China will retaliate and deteriorating trade will impair the Chinese economic growth engine. A third of Australian exports go to China and Chinese capacity to pay for these exports will reduce significantly.
Another interesting impact might be on property prices. If the Chinese economy slows, capital flows from China into new Australian property slow. With the potential for one of the biggest drivers of new property investment, which underpins housing construction demand, we may see housing prices (but particularly newer apartments) come down in price significantly. If a trade war emerges, it may be the catalyst that ends the housing construction boom Australia is going through.
Disclaimer
Any advice contained in this update is of a general nature only and does not take into account your circumstances or needs. You must decide if this information is suitable to your personal situation or seek advice. Prior to investing in any particular product, you should read the Product Disclosure Statement.
Snowgum Financial Services Pty Ltd (ACN 603 703 859 is a Corporate Authorised Representative (Corporate ASIC AR number 001001581 ) of Peter Vickers Insurance Brokers Pty Ltd (Australian Financial Services Licensee (AFSL) No 229302 & Credit Licensee (ACL) No 229302 ǀ ABN 68 074 294 081).