Challenging the consensus on Trumpenomics
More than a half a year has passed since financial markets were shocked at Donald Trump’s US election victory, but some recent trends have developed that challenge some of the earlier opinions formed by financial market commentators about potential implications of Trump’s election.
Some of these earlier thoughts were repeated so often that we could easily mistakenly believe the level of supposed certainty surrounding the future course of ‘Trumpenomics.’ Investors may be better served by focusing on the uncertainty, which at times has been downplayed by markets. This sounds like a negative stance, but with uncertainty comes opportunities, and they may not always appear in the likely destinations and sectors you read about.
What were the popular financial predictions from Trump’s victory?
Some popular predictions for 2017 that emanated from Trump’s victory included:
- The reflation trade will continue to see US stocks outperform, accompanied with a trend of higher treasury yields amidst plenty of volatility.
- Emerging markets were also widely tipped to underperform on the back of concerns over the global trade implications from the Trump presidency.
Yet over the first four months of 2017, the opposite has occurred.
Emerging market equities have been significant out-performers this year despite plenty of publicity surrounding the positive trend of the US share market. Most emerging markets came from a starting point this year of significantly cheaper valuations, treasury yields have been remarkably stable thus far in 2017, and four months in were lower than where they began the year.
The VIX index, a popular measure of volatility of the US share market, has also surprised nearly every pundit, hitting record lows and signalling a calm state of markets.
What signals is the financial market giving us?
Whilst financial markets can often give us false signals, it is worth at least investigating what they may be telling us and why perhaps the initial thinking on the Trump effects may not be so certain. The expectations were instantly high that Trump can cut taxes and free up regulations. With how much success this can be achieved is still debatable, but what is perhaps less debatable is that markets have set a high pass mark for what they are hoping for.
Rather than hoping for success here, are we seeing signs that investors are searching for other investment destinations that perhaps already exhibit a lower tax environment and less red tape? Are investors now questioning the consensus that any instability in global trade policies is a major negative for emerging markets, and pondering who is really the biggest loser under any potential trade war?
If we place faith in Trump delivering on the plan to cut corporate taxes, can we be sure this is the panacea some supporters would have us believe? Whilst on the surface US corporate taxes may appear high, corporations have shown they are quite capable of getting their effective corporate tax rate paid down to lower levels. It is also questionable as to whether the economy as a whole stands to benefit. During the 1950s and 60s, the US enjoyed relatively prosperous times amid much higher effective corporate tax rates. Tax cuts may place pressure on budget deficits, and a subsequent boost in economic growth is by no means assured. The US is already experiencing growing wealth inequality and there is still much guesswork over where the future tax landscape settles.
US bond yields as a positive sign
One shining light from this backdrop is the relatively benign environment this year for US bond yields. This is such a crucial market for funding levels globally, and ironically it could be that mild disappointments with Trump being able to administer his policies could prolong relatively easier monetary conditions going forward. This may be an environment that favours yield sensitive sectors such as commercial property, and better still if one can seek out relative value in other cheaper global markets with solid growth prospects.
Proposed infrastructure spending
Another dimension associated with the Trump reflation trade was the perceived kicker that could stem from significant boosts to proposed infrastructure spending. This also seems to be a case of investors fixated on Trumpenomics and perhaps not challenging the consensus and considering other opportunities. Whilst the infrastructure plan may sound impressive in numbers, if one looks at what China propose over the next few years, it suddenly becomes at best quite underwhelming. At the same time, on many various accepted valuation measures we find the US share market is priced extremely high when compared to the Chinese market.
If we keep accepting the various consensus predictions surrounding what the Trump win means for investors, we may find ourselves neglecting other opportunities.
Even with many sceptics regarding the Trump administration, funding markets are still operating smoothly for those business opportunities that are based on sound prospects. Varna Capital is certainly prepared to broaden its thinking beyond the consensus, and this has led to extensive experience in commercial finance across a wide range of sectors on a global scale.
Varna Capital provides developers and commercial property investors with market leading access to a broad range of financing options. We utilise strong capital partner relationships that include bank and non-bank alternatives from Australia and across the globe.
Get in touch with Varna Capital here.