Trump for president?

Building walls not bridges: To what extent does Trump pose a danger for financial markets?

M&G’s Richard Woolnough said this week that a victory for Donald Trump in the US election would be more of a concern for markets than a potential Brexit. Certainly, while the jury is out on a Brexit, there are few – apart from, apparently, a lot of Americans – who believe that a Trump victory would be a good thing.

Why is Trump such an unpopular choice? Certainly his ham-fisted approach to immigration seems to run counter to the long-held belief that part of the dynamism of the US economy comes from its open immigration policy. His plans to ‘build a wall’ also suggest a rather loose approach to fiscal discipline.

There is also a danger that Trump’s bullishness aggravates international tension at a time when some stability is needed. Inflammatory rhetoric about immigrants, Muslims and Mexicans does little to promote the harmonious global relations on which trade flourishes and of which markets are fond.

He could well start trade wars, to the detriment of everyone involved. There are also a number of other potential Trump policies that worry international investors. He could remove Janet Yellen at the Federal Reserve, and though any replacement would ostensibly be independent, few would consider them so. In general, markets would just fear a bull-headed and over-emotional policy-making agenda.

However, in the long-term effecting real, lasting change in the US economy and society is difficult, as President Obama has found. Trump’s more radical policies would likely be thwarted by Congress and in the meantime, the US economy motors on: job creation data is still robust; wage inflation appears under control and the prospect of recession appears to be a remote one.

The more likely prospect is that Hillary Clinton becomes President this year. She appears to have tempered some of her more radical policies and is arguably far more business-friendly and less-protectionist than Trump. Investors could probably expect more of the same from her tenure and certainly, her accession does not pose the same risks to markets.

The problem, as ever, with the US, is that its stock markets are expensive. Most of the time, this premium rating is justified because the economy grows more quickly and the country offers a fertile environment for companies to grow their earnings and profits. However, if this is threatened for any reason, those valuations could quickly start to look very expensive.