Every Chinese New Year, AsianInvestor makes 10 predictions about developments that will affect global financial markets and the portfolios of Asian investors, especially asset owners. These developments can focus on asset classes, geopolitical events, or structural issues surrounding particular markets.
We begin with perhaps the most anticipated geopolitical development of the year: the coming US presidential election.
Will US president Donald Trump be re-elected?
It’s almost a cliché at this point, but the facts bear it out: it is very hard to dislodge an incumbent US president from winning re-election to a second term. That rule means the world should prepare for more Donald Trump.
The US president is a narcissist and a flagrant liar who delights in insulting critics and rivals. He has also been lucky. The US economy’s growth is weakening, but slowly, and the US Federal Reserve has so far been able to cut rates to help avoid a recession. That’s helped Trump to boast about record low unemployment levels and new stock market highs.
In addition, the huge tax cut he and the Republican Party pushed through in 2018 helped companies and wealthy people reap enormous savings (even as it eviscerated longstanding Republican Party commitments to fiscal discipline). All of that has meant that while US GDP isn't growing fast, it's doing okay. And incumbent presidents only tend to be kicked out when the economy is in a recession.
This isn’t to say Trump doesn’t face problems. Many centrist US voters have become jaded by his incessant insults, lies, preference for the company of dictators and almost comical desire to profit from the presidency. In addition, Trump has been impeached by the House of Representatives and the trial taking place in the Senate could throw up damning evidence of abuses of power, hurting his re-election chances.
Still, Trump is highly unlikely to be removed from office. Republican senators are terrified that anything less than complete devotion to him will cause fanatic Trumpists to challenge them for their offices. Such behaviour is cowardly but understandable: many (mainly white, non-college educated) voters love Trump, meaning he has a seemingly immovable base of around 40% to 42% of likely US voters.
All Trump needs to do is sow enough seeds of doubt about his eventual Democratic rival to ensure victory once more, in the electoral college if not the popular vote. The smart money is that he's got more than enough dirty-fighting nous to do so.
In the short to medium term, a Trump re-election is probably positive. As fund managers and economists told AsianInvestor, uncertainty is always damaging for financial market prospects, and a win by any Democrat challenger would ensure that – especially if they were a Bernie Sanders or Elizabeth Warren, and committed to upheaving the US’s medical industry and limiting corporate power.
That means equity markets, while looking toppy, may have a rally on the election result, and the Fed would probably find it’s able to print more Treasuries without too many issues. An election victory might also pave way for phase two of the trade war negotiations (although whether Trump cares about pursuing these after re-election is harder to predict).
In the long term it’s harder to say how a Trump re-election would pan out, but risks would rise. The 73 year-old is dangerously ignorant of world affairs and delights in using the largest economy in the world to browbeat everybody he can – an executive form of ‘might makes right’.
That could pave the way for more norms-breaking, particularly given that the US may not be able to stave off a recession forever. At a bare minimum it would mean the government of the world’s largest economy continues using threats and tariffs to get its way, actively undermines efforts to prevent global warming and probably rolls back healthcare coverage in the US. It could also start pulling US troops back home, disrupting the world geopolitical order. It’s even possible the US withdraws from Nato.
Trump may well get back into power, but a second term of his norms-breaking leadership is likely to ultimately prove far more disruptive for markets than a change of president.