A surprise Trump victory

A Trump precedency has a number of implications for the global and Australian economies. Australia is a small and open economy that relies on export earnings for a significant proportion of GDP. A Trump presidency has serious implications for global trade policy which would put Australia’s export markets at risk.

Trump has said he would aggressively renegotiate trade agreements and increase tariffs, especially on China. This approach has the risk of starting a global trade war which would be disastrous for the global economy and Australia. A Trump presidency will also create economic and policy uncertainty that, coupled with the risk of a trade war, would be an important consideration for the Fed. Although the market had expected a Fed rate hike in December, it is now likely that the fed will delay raising rates into 2017.

Global equity markets would also face short term volatility. Emerging markets are the most at risk given the trade implications and tightening financial

conditions from a higher USD. The Australian dollar is highly correlated to emerging market currencies so we are likely to see some weakness in the local currency as well.

A depreciating AUD, increased uncertainty and a potential trade war would put the RBA in a difficult position. It would want to cut rates to stimulate the economy but would need to also balance that with the lower AUD and the risk of stoking inflation.

Longer term, the implications of a Trump presidency are less clear. Policy talk is easy but implementation and congressional approval are much harder to

achieve. Regardless, investors should brace for a period of increased volatility. In this environment, investors should aim to have a well-diversified portfolio and an appropriate level of cash to best weather the storm.