Stocks could suffer as Trump trade policy takes shape

Stocks could suffer as Trump trade policy takes shape
Traders work on the floor at the opening of the day's trading at the New York Stock Exchange (NYSE) in Manhattan, New York City.
PHOTO: Reuters

The year-end stocks rally on the heels of the election of Donald Trump as US president was built on expectations of reduced regulations, big tax cuts and a large fiscal stimulus.

Now signs are emerging from the Trump camp that harsher trade policies that could jeopardize the honeymoon are likely in the offing, and investors would be well advised to give those prospects more weight when gauging how much further an already pricey market has to run.

By naming China hawk Peter Navarro as head of a newly formed White House National Trade Council, the incoming administration is signaling Trump's campaign promises to revisit trade deals and even impose a tax on all imports are very much alive.

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Among the policies favoured by Navarro and Trump's pick for commerce secretary, Wilbur Ross, who has the president-elect's ear on a range of economic issues, is a so-called border adjustment tax that is also included in House Speaker Paul Ryan's "Better Way" tax-reform blueprint.

If implemented, economists at Deutsche Bank estimate the tax could send inflation far above the Federal Reserve's 2 per cent target and drive a 15 per cent surge in the dollar.

Analysts calculate that, all else being equal, a 5 per cent increase in the dollar translates into about a 3 per cent negative earnings revision for the S&P 500 .SPX and a half-point drag on gross domestic product growth.

Donald Trump wins US presidency in stunning upset

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    Donald Trump has stunned America and the world, riding a wave of populist resentment to defeat Hillary Clinton in the race to become the 45th president of the United States.

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    The Republican mogul defeated his Democratic rival, plunging global markets into turmoil and casting the long-standing global political order, which hinges on Washington's leadership, into doubt.

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    "Now it is time for America to bind the wounds of division," Trump told a crowd of jubilant supporters in the early hours of Wednesday in New York.

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    "I pledge to every citizen of our land that I will be president for all Americans." During a bitter two-year campaign that tugged at America's democratic fabric, the bombastic tycoon pledged to deport illegal immigrants, ban Muslims from the country and tear up free trade deals.

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    His message appears to have been embraced by much of America's white majority, disgruntled by the breath and scope of social change and economic change in the last eight years under their first black president, Barack Obama.

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    Trump openly courted Russian leader Vladimir Putin, called US support for NATO allies in Europe into question and suggested that South Korea and Japan should develop their own nuclear weapons.

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    The businessman turned TV star turned-politico - who has never before held elected office - will become commander-in-chief of the world's sole true superpower on January 20.

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    The results prompted a global market sell-off, with stocks plunging across Asia and Europe and billions being wiped off the value of investments.

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    Although he has no government experience and in recent years has spent as much time running beauty pageants and starring in reality television as he had building his property empire, Trump at 70 will be the oldest man to ever become president.

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    Yet, during his improbable rise, Trump has constantly proved the pundits and received political wisdom wrong.

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    Opposed by the entire senior hierarchy of his own Republican Party, he trounced more than a dozen better-funded and more experienced rivals in the party primary.

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    During the race, he was forced to ride out allegations of sexual assault and was embarrassed but apparently not shamed to have been caught on tape boasting about groping women.

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    And, unique in modern US political history, he refused to release his tax returns.

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    But the biggest upset came on Tuesday, as he swept to victory through a series of hard-fought wins in battleground states from Florida to Ohio.

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    Clinton had been widely assumed to be on course to enter the history books as the first woman to become president in America's 240-year existence.

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    Americans have repudiated her call for unity amid the United States' wide cultural and racial diversity, opting instead for a leader who insisted the country is broken and that "I alone can fix it."

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    If early results hold out, Trump's party will have full control of Congress and he will be able to appoint a ninth Supreme Court justice to a vacant seat on the bench, deciding the balance of the body.

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    So great was the shock that Clinton did not come out to her supporters' poll-watching party to concede defeat, but instead called Trump and sent her campaign chairman to insist in vain the result was too close to call.

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    "I want every person in this hall to know, and I want every person across the country who supported Hillary to know that your voices and your enthusiasm mean so much to her and to him and to all of us. We are so proud of you. And we are so proud of her," chairman John Podesta told shell-shocked supporters.

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    "She's done an amazing job, and she is not done yet," he insisted.

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    Musician Lagy Gaga stages a protest against Republican presidential nominee Donald Trump on a sanitation truck outside Trump Tower in New York City after midnight on election day November 9, 2016.

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    A street performer dressed as the Statue of Liberty hold photos of U.S. presidential candidates Donald Trump and Hillary Clinton at the financial Central district in Hong Kong, China November 9, 2016, after Trump won the presidency.

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    A "Naked Cowboy" performer supporting Donald Trump walks through Times Square in New York, November 9, 2016.

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    People react as they watch news on a screen to follow the results of the final day of the US presidential election at an event organised by the American consulate in Shanghai on November 9, 2016.

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    Protesters against president-elect Donald Trump march peacefully through Oakland, California.

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    A separate group earlier in the night set fire to garbage bins and smashed multiple windows.

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    Police officers chase a group of about 50 protesters.

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    University of California, Davis students protest on campus in Davis, California.

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    An invitee places a cookie depicting U.S. Democratic presidential nominee Hillary Clinton on a table at the US presidential election results watch party at the residence of US Ambassador to Japan, Caroline Kennedy, in Tokyo.

The dollar index .DXY has already gained more than 5 per cent since the US election.

Harsher trade policies may not cause a full economic slowdown, "but I'd expect a localized recession in manufacturing and smaller gains in factory employment as well," said Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management in Menomonee Falls, Wisconsin.

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He said the border tax could trigger retaliation, pouring uncertainty into the market.

"Even if the drafters of the legislation have pure intentions, other countries could use this as a pretext for propping up or subsidizing their own favourite industries."

TOP ECONOMY RISK

Stocks have rallied broadly since Nov. 8, with the S&P 500 advancing by 5.7 per cent and the Dow Jones Industrial Average .DJI surging nearly 9 per cent to brush up against the 20,000 mark.

Some sectors, such as banks .SPXBK, have shot up nearly 25 per cent in the post-election run.

US equities have gotten substantially pricier from a valuation vantage as well.

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The forward price-to-earnings ratio on the S&P 500 has risen by a full point since Election Day, from 16.6 to 17.6, Thomson Reuters data shows.

That makes stocks about 17 per cent more expensive, relative to their earnings potential, than their long-term average multiple of around 15.

Small caps have gotten pricier still. The forward multiple on the Russell 2000 has risen to 26 from 22 on Nov. 8, up 18 per cent, while the index price has climbed 14 per cent.

Things Singapore investors need to know after Trump's win

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    Donald Trump (shockingly) won the US election. As far the financial markets are concerned, here are eight things that all Singapore investors should know about.

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    1. Gold price is going up: Trump's victory has already seen a flight towards gold, as investors seek safe haven for their money.

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    2. Uncertainty will cause sell-off, stock markets will drop: Investors, both institutional and retail, hate uncertainty, and that uncertainty is going to cause sell-off, leading to price drop across global equity markets.

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    3. Panic leads to opportunity?: Remember the famous Warren Buffet quote, "be fearful when others are greedy, and greedy when others are fearful"? Well, you can now put this to the test.

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    4. Watch the US Dollar close: While the popular sentiment is that the USD is going to depreciate as a result of Trump's victory in the short-run, the long-term performance of the USD is very much subjective still.

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    5. Look out for local companies that deal heavily in US contracts: The uncertain future of the USD will be one to keep watch on, particularly for investors who own local stocks that have their contracts in USD.

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    6. Bonds to be in demand again: With investors fearing that Trump's election will bring global uncertainty, prices of treasury bonds across the globe has seen a spike in price.

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    7. High quality dividend stocks might be in play: There are many good local blue-chip companies that have been through recessions after recessions. They still continue to do well till today. Stick to them.

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    8. Avoid panicking: The stock market is full of ups and downs, as it fluctuates largely based on human emotions.

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    We have already seen a shocking poll result earlier this year when the UK voted to exit the EU. As expected, markets sell-off were immediate. But life still have to go on. We still have to invest for our future and our retirement.

S&P 500 earnings are expected to rise 12.5 per cent next year, according to Thomson Reuters Proprietary Research estimates.

Anything that impedes companies from achieving that target, such as a bump from a trade spat or further dollar appreciation in anticipation of new trade barriers, would undermine equity valuations.

In the latest Reuters poll of US primary dealers, economists at Wall Street's top banks cited Trump's evolving trade policies over other factors, such as fiscal policy, a strong dollar and higher interest rates, as the greatest risk to the near-term economic outlook.

The idea of a tax on imports "should alarm people," according to Michael O'Rourke, chief market strategist at JonesTrading in Greenwich, Connecticut.

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"If we do have a trade war that's going to be a major negative" for stocks, he said, adding that the upward momentum in equities, alongside the lack of participation due to the upcoming holidays, have so far prevented a repricing but "we could cap the rally here, that could very well happen."

O'Rourke said technology, a sector that represents the globalisation trade, would be among the hardest hit by taxing imports.

Deutsche Bank's auto sector equities analyst estimated the border tax could slam other industries that rely on global supply chains, with the cost of a new car, for instance, jumping by as much as 10 per cent.

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