The US election: landslides and cross-currents

Donald Trump and the Republican party won a massive victory in the US elections.

•    In all 50 states the Republican vote increased on 2020
•    Ninety percent of US counties saw swings to the Republicans
•    Donald Trump became the first Republican candidate since a post-9/11 George W Bush to win the popular vote.

What does this means for markets? With Republican control of the White House, Senate and House, President Trump has a mandate for his key policy positions. His headline economic policy was a general 10% increase in tariffs and a 60% tariff on Chinese goods. In short, a Trump win isn’t good for China – or for Chinese stocks.

Not so fast, not so linear

In economics and investment markets, life is rarely so linear. It’s more about assessing the impact of a whole range of cross-currents. So “Trump wins, China loses” is not enough to guide investment thinking. There are a number of reasons why the consequences of a Trump win could be different to those many expect.

One is the nature of a Trump presidency. The essential truth about President Trump was first captured by Salena Zito in The Atlantic in 2016. “The press takes him literally, but not seriously; his supporters take him seriously, but not literally.”

Given that heartland America will suffer from higher goods prices at Walmart and Costco if Trump’s tariff ‘plan’ was implemented in full, it’s unlikely we’ll see a universal 60% tariff on Chinese goods. Voters expect him to go in the direction of that policy but not to get to a final destination that makes their life harder – especially after an election where inflation was the driving factor.

We’ll probably see a 60% tariff on some Chinese imports and no change on others, which may lead to the average tariff on Chinese imports increasing from roughly 10% today to closer to 20%. That makes life harder for Chinese exporters – but not impossible.

As our first line of defence against this outcome, the high-quality Chinese stocks we own are largely consumer focused – travel businesses, online marketplaces, delivery firms. They’re less likely to be affected by Trump tariffs – small or large.

Action and reaction

The other non-linearity about a Trump election victory is the assumption that China would be passive in the face of a global economic environment reshaped by a Republican victory.

As we expected, over the weekend China’s National People’s Congress released another stimulus announcements, this time unveiling a 10 trillion yuan (US$1.39 trillion) fiscal package designed to fix the balance sheets of local government. Ideally this money will revive government spending at a local level, improving infrastructure and overall demand.

Markets reacted negatively to this stimulus, looking for more direct support for the consumer and perhaps more attention to China’s ongoing property slump. Yet it’s unlikely this is the full China response. We’ll probably see more stimulus packages over the next year and, combined with a slow organic recovery, these could support Chinese stocks even in the face of a tougher trading environment.

Debts and Deficits

The incoming Trump administration has an overwhelming mandate and has promised to cut taxes. On a linear view, this puts further pressure on the US budget, adds to deficits and is likely to boost inflation. Yet again, there are cross-currents that could alter that pattern. Global bond markets could enforce their own fiscal discipline on a Trump government, pushing up rates if the deficit looks to be out of control and forcing restraint on US spending.

Lessons from a landslide

At Platinum, we rarely seek to exploit single events that move markets. For a start, there are too many surprises. Few pundits expected Trump to win all seven swing states and for the result to be clear within 24 hours.

We also try to avoid linear thinking - assuming that in complex systems like markets and economies, A will lead to B.

In our experience, complex systems are more driven by cross-currents than tides. Our job is to analyse companies with close attention to quality and management and to find those where too much linear thinking has led to incorrect pricing. That creates investment opportunity.