US elections: Turning promises into policy could be tortuous

“The US election and the prospects of a Trump presidency loom large over markets,” notes Colin McQueen portfolio manager at the UK-based SanlamFour. “The Brexit vote highlighted how current conditions are polarising electorates, with more extreme parties and candidates garnering support. Polls are currently leaning against Trump, but we have seen polls being wrong before!”

Trump will cause markets to tumble

McQueen deems a Trump win would undoubtedly cause a sharp sell-off in markets, but the actual economic impact will evolve more slowly. “The defining feature of US politics over the last decade has been the divided nature of Congress, which has hamstrung the flexibility of US policy. Whoever wins, this dynamic means turning campaign promises into policy will be tortuous.”

Madalet Sessions, head of the multi asset class division of Denker Capital, a boutique partner of Sanlam Investments, views both candidates as deeply flawed and widely disliked.  “It is unclear whether either candidate has what it takes to unite the people. As is true in South Africa the US is in need of structural reforms to resolve some of its major challenges. Unfortunately, the Republican has provided little detail on how to ‘make America great’ and the Clinton plan is not much of a plan either.”

Watch the mid-term elections instead

Actually, the outcome of the US mid-term elections for the US House and Senate seats (far less widely followed than the presidential elections) might be of more significance this year.

“Our evaluation of the different policy proposals,” says Sessions, “suggests that the Republican party’s four-year agenda on how to restart growth in the economy is more likely to be successful.  ‘A Better Way’ outlines comprehensive tax reform, promotes competition in the health care market and reforms incentives in welfare programs to encourage work and income mobility.  If the voters return Republican majorities to the House and Senate it is likely that these reforms will be enacted and that maybe the US can see growth improve to 3%.  Recovery in the US economy will have far reaching consequences for SA investors and the likelihood of a growth resumption in the US will be determined not by the presidential election, but by the mid-term outcomes.”

In the short term not much may change

Investment economist Arthur Kamp observes, “If neither the Democrats nor the Republicans take full control of Congress, policy changes are unlikely to be far-reaching in the near term. Financial markets, notably the currency market, may show something of a response either way, but ultimately proposed legislative changes that have a meaningful, lasting impact on the economy are likely to take a long time to implement (or may never be implemented).”

Both candidates favour increased spending, but they differ on taxes

But, what are the policy differences? “To start,” says Kamp, “there is a high level of interest in the likely fiscal stance of each candidate. At the risk of over-simplification, the Democrat and Republican candidates appear to favour fiscal expansion. That would fit in with the thinking of a growing number of economic commentators who believe monetary policy is approaching the limits of its potential influence over real economic activity and inflation expectations in the large developed economies. The solution being offered is increased government spending, on condition that it focuses on fixed investment spending and is limited to countries where there is fiscal space. The expectation is that the Democrats, led by Clinton, would favour increased spending funded by tax increases focused on the wealthy and business, whereas Republicans led by Trump are expected to pursue increased spending and some tax cuts at the expense of a larger budget deficit.”

Will the land of the free remain free?

Secondly, US fiscal policy aside, one of the more important potential implications, including the global economy, is the stance of each candidate on global free trade. “Will the land of the free support continued progress to free trade?,” asks Kamp. “It is not straightforward to summarise each candidate’s policy stances. What we can observe, though, is that neither candidate supports progress towards the Trans-Pacific Partnership (TPP). This is no surprise as regards Trump. A Trump-led presidency is mostly expected to adopt a markedly more protectionist stance on trade in general, including a particular focus on China’s trade policies and the level of China’s currency. In contrast, Clinton appears relatively more supportive of a free trade agenda, but it seems only to the extent that trade agreements do not harm US jobs and wages.”

Immigration policy inextribably linked to economic growth

“Finally, aligned with the question of trade policy is the question of immigration. A Trump Presidency is expected to favour greater control over immigration. However, while not influential in the near term, demographics plays a key role in the long-term outlook for economic growth. When population growth ebbs to the point where it eventually falls outright, the only means to promote GDP growth is through productivity gains. That is not easy to do consistently over the long term”, says Kamp.

Read more about the differences between the candidates here.