What a Trump-led US augurs for Asia and markets this year

If 2016 was considered uncertain, this year will be exponentially so. Donald Trump will be sworn in as the 45th President of the United States today, and already, there are grave concerns over the implications of his presidency. In a world already in flux, what kind of 2017 might Trump’s leadership foreshadow, especially for those of us here in Asia?

Similar to most people, I started with a lot of concern about what the Trump presidency means and all the things that could go wrong. Much of Trump’s rhetoric and many of his statements have been deeply unnerving, putting many people on edge. I believe the Trumtweets will continue, and markets will see-saw through the year. More importantly, there is a real possibility of accidents as people react to his flippant comments in real time. However, that notwithstanding, my base case, which offers a little more optimism than most people have, is that he will do less damage than most people think, and that the global economy in 2017 may well surprise on the upside.

I base my views on two broad considerations:

• I believe that the US economy has a lot more momentum and strength than is currently being forecasted, and contrary to popular belief, growth is not a zero sum game. A strong US economy actually lifts a lot of boats around the world. This is further coupled with short term resilience in Europe (Germany in particular is quite strong), and a degree of stability in China, where there is every incentive to cushion the economy going into the year-end Standing Committee elections.
• While Trump has indulged in a lot of demagoguery over the past months, the Trump who will show up to work will be Trump the businessman, not Trump the demagogue.

US economy, and its global impact

Trump is inheriting a US economy which is looking pretty good. In recent quarters, consumption has improved notably. Consumer confidence is at a high. Retail sales continue to move upwards, and housing prices in many large cities have rebounded to pre-financial crisis levels. This has a wealth effect, so despite the deleveraging in some quarters, consumers feel wealthier and this should put support under consumption.  

The labour market is near full employment. Unemployment rate hit a nine-year low of 4.6% in November last year. This is showing up in rising wages, which is a catalyst for continued robustness in consumer demand. 

So far, the only fly in the ointment is business investment. This is likely to get positive impetus if Trump does end up pushing through tax reforms, which will spur domestic investments. Fiscal stimulus, albeit small, should also create investment in the economy.

Taking all this into account, the US economy may finally break through the shackles of the 2% GDP we’ve seen for the last four to five years. We’re likely to see a GDP growth rate this year of 2.5% to 3%. This momentum in the US economy is important because it will drive global growth, and we should therefore expect to see a pickup in Asia.

Generally, the narrative has been that if the US is strong, money will move out of Asia and everybody will go to the US. Historically, that happens for a few months but a strong America always has outbound investments. The correlation between a higher USD and Asian equity is very positive, for example.

If we look at the November and December data, production and export data for Japan is looking very good – a weak yen and very strong US dollar helps. Japan pencilling in 0.5%, 0.6% growth is a surprising upside. Taiwan and Singapore data also saw a pop. Around the region, by and large, Asia’s export agents tend to benefit from positivity in the US.

Trump the businessman, and his likely path

Trump is a businessman at heart. What stands out is that his instincts are big business and this shows up in his choice of a Cabinet. For the longest time, the US has not had such a pro-business Cabinet. Everybody is from a deep business background – the people who run large companies, who have a keen interest in being able to drive business activities around the world.

This winter, I also took the opportunity to read Trump’s book “Trump: The Art of the Deal”. I was struck by how he operates – his strategy around negotiation is to first take an extreme position, then work back and try to negotiate a deal that is advantageous to his side but not extreme. This can be seen in his election campaign and his rhetoric. My belief is that he is intrinsically such a deal-maker that ultimately, his business instincts will come to the fore.

Uncertainty will be a main driver in 2017

What could go wrong?

• Trade protectionism. Trump and the Cabinet could tick the boxes, make a lot of noise about people taking jobs from America, shut some plants in Mexico or apply anti-dumping duties on China. I expect them to do that. But trade protectionism hurts the US more than many people think, and my sense is that Trump will likely end up making some cosmetic changes only. However, if the US does wind up being a very protectionist state, then all bets are off. Still, my own bias is that I don’t think we will see that much of that.
• A much faster interest rate hike cycle in the US than people are taking into account right now. We could see a lot of uncertainty on the back of that.
• Geopolitics. Beyond what Trump says and how China might respond, uncertainty also comes with China trying to establish its hegemony in this part of the world. The rising power is always trying to spread its elbows. In some ways, the next three to five years could actually be seminal on that account.

I’m sometimes struck by how quickly the British empire unravelled. Think about Great Britain – within a 10-year period after the end of the Second World War, the Commonwealth disappeared. When things start unravelling, they happen very quickly.

If Trump does follow through on his agenda of reversing from American exceptionalism and looking at some degree of US withdrawal from the Middle East, NATO alliances, the alliance with Japan and from a presence in Asia, that will create an opportunity for China to try to fill in the vacuum very quickly. Some of the measures and the policy announcements we’ve seen from China are actually indicative of that.

Each of these factors create a degree of uncertainty which is, frankly, very unusual.

On balance, however, I believe we will see the US economy continue to gain momentum, and if so, this year will offer opportunities. The risks, however, are real. We will need to be very careful and thoughtful.