Jonathan Marriott – Chief Investment Officer, LGT Vestra LLP
As the Christmas decorations are stored away for another year and the crackers leave the supermarket shelves, the retailers will be looking to the next holiday they can capitalise on: Easter. With this in mind and the inauguration drawing closer, it made me wonder; is a Trump Presidency like an Easter egg, waiting to be opened?
On the outside there is a cardboard box that has the manufacturer’s label which reads ‘Republican’. However, the box has large oval windows which reveal the egg wrapped in gold foil, disguising what is beneath it. The packaging is colourful and designed to be attractive to the eye but gives little insight as to what is inside. It may contain delicious chocolates, something less tasteful or be entirely hollow. Trump’s campaign was long on populist rhetoric but short on practical policies. His packaging does provide some indication of what is inside; we know that he will be tough on trade and wants to spend on building infrastructure. However the Republican brand, where the tea party may be anti a growing deficit, could constrain his spending plans. Trump planned to scrap ObamaCare throughout his campaign, but after meeting Obama he acknowledged that it was not all bad. At his recent press conference he said it would be replaced with something terrific. In fact his press conference was full of words like terrific, fantastic and incredible; they sound good but give little idea of what will actually happen.
Beneath the gold foil we expect a chocolate shell but we have little idea of the quality and the real treat that is hidden inside. We can speculate, analyse and guess for hours but, in reality, we will only find out what it is when we break into the shell on Easter Sunday morning. As with the Easter egg, we will have to wait and see on Trump. We doubt very much that it is a Fabergé egg but nor will it be entirely hollow. So far, his words are populist but many appointments appear to favour big business. Some commentators say that his more extreme rhetoric on trade is just a negotiating position and in the end he will be prepared to cut deals. He has apparently already moderated many of his campaign promises and so it is particularly difficult to understand what a Trump presidency means.
The Chinese relationship will be particularly important. Over the last few years Chinese investment in Treasuries has helped keep long-term US interest rates low, supporting US growth. This, in turn, increased demand for Chinese goods supporting the Chinese economy and expanded their ability to buy more US bonds. Initially, China’s reaction to Trump’s victory appeared positive but talking to Taiwan and putting up trade barriers may crack this circle. Bringing jobs back to the US may be a laudable aim domestically but, if it raises the funding costs, may damage long-term growth.
We may find that if he gets ‘good eggs’ in his cabinet and sufficient backing in Congress for his infrastructure plans, there will be some sweet surprises in the egg when it is opened. In any event, infrastructure spending and tax cuts take time to come through and it may be Easter 2018, or even longer, before these come into effect. By the end of his term in the Oval Office we may look back on his presidency as the proverbial ‘curate’s egg’, “good in parts”.