How will President Trump's Policies Affect Canadian Investors
With the election of President Trump now confirmed, here is a breakdown of the policies that could impact the markets for Canadian investors from Philip Petursson Chief Investment Strategist at Manulife. A lot of Canadian investors have been expressing concerns about the potential outcome and the eventual impact on the markets and economies Trump could have, it is important to remember two things about the U.S.:
1. Within a diversified portfolio, an allocation to the U.S. stock markets should be viewed as a strategic allocation, not a short term tactical trade, given the depth and breadth of the market and the number of quality companies.
2. The founders of the Constitution thought it was best that there be checks and balances in place within the U.S. political system (Congress, the Senate, the Supreme Court, etc.) in order to prevent the abuse of power by any individual executive branch.
The following is by no means a complete analysis of the impact of President Trump’s policies, we do attempt to cover the major issues facing the capital markets given the stated views during the campaign.
President Trump on Energy
President Trump supports “Frack now and Frack fast” 1 . He supports offshore drilling and exploration, as his goal is to be “totally independent of any need to import energy from the OPEC cartel or any nations hostile to our interests”. Trump plans to achieve energy independence by 2022 by removing regulations on oil and gas companies and lifting moratoriums on energy production which would increase US shale production. Donald Trump has also said that he would reverse President Obama's rejection of the Keystone XL pipeline deal. However, he said that he would only reverse it after negotiating a better deal.
1 Twitter, May 30, 2013
Looking at the oil market from a supply/demand dynamic, President Trump’s plan would likely increase supply, while not necessarily impacting demand, thus potentially having a negative impact on price. However, his policy to reduce regulation on the energy industry would improve the competitiveness of energy drillers and coal companies. This could help employment and profits in the sector.
President Trump on Taxation
Trump tax plan lowers the business tax rate from 35% to 15%. At 35%, the U.S. has the third highest general top marginal corporate income tax rate in the world. The worldwide average top corporate income tax rate is 22.9%. According to his campaign, the current business rate is preventing U.S companies from making domestic investment unattractive. The plan also includes a 10% tax on repatriation, which could bring trillions of dollars back into the U.S.; American companies are holding $2.5 trillion abroad, which has increased 20 percent over the past two years. This is equivalent to nearly 14 percent of the total U.S. GDP.
Trump’s plan is targeted at stimulating the economy. Trump’s plan assumes that companies and individuals would use tax savings to invest back into the economy. Under the plan, the tax cuts should lead to stronger economic growth if corporations and households spend their excess income. This may lead to an increase in sales growth and will likely lead add to the bottom line of U.S. corporations.
Trump’s plan could lead to less competitiveness for Canadian domiciled U.S. companies as corporate Canada has lower tax rates. For manufacturing, the US manufacturing combined corporate tax rate is ~30% whereas it is ~20% in Canada.
President Trump on Trade
Trade will be an important driver of economic growth along with other key structural reforms. It is not within the President's power to impose new tariffs; however, the president could change pre-existing tariffs if certain conditions are met. The president through the US Treasury and the Commerce Department might have a free hand in cases where industries are allegedly suffering 'market disruptions'.
President Trump’s plan will be to ensure that all U.S. trade agreements increase the GDP growth rate, reduce the trade deficit, and strengthen the domestic manufacturing base. He plans to stop the Trans-Pacific Partnership (countries within TPP account for 40 percent of global economic output) at almost any cost. He also plans to renegotiate the North American Free-Trade Agreement (“NAFTA”) as he believes it is harmful to American workers. Manufacturing has actually increased tremendously since NAFTA, as the US produces approximately 60% more than it did before the deal came into effect. As well, Canada, Mexico and the US have become increasingly more intertwined over the years. For example, 35% of US exports go to Canada and Mexico. His plan has a clear focus on protectionism and will focus his sights on China on many fronts.
Impact on Small Business
Monique Moreau, director of national affairs at the Canadian Federation of Independent Business, which represents more than 109,000 small businesses in Canada: “About 50 per cent of our members import from the U.S., and about 25 per cent export, so that’s a significant amount, and if there is a decrease in access to the U.S., that will certainly have an impact on our members. But we’re still very much in wait-and-see mode at this time.” Canada and Mexico are important trade partners for the U.S. and therefore, it is unlikely that policies geared negatively towards Canada will be implemented. For example, 35% of US exports go to Canada and Mexico. Exchange between Mexico/US and Canada/US tend to part of the manufacturing value chain. Unwinding these contracts could prove extremely difficult.
President Trump on Your Investments
In general we believe markets may experience higher volatility given the uncertainty of the President Trump proposed policies. If the Obama presidency is any indication however, a President's ability to implement policy can be influenced by the willingness for compromise or lack thereof, between the two executive branches. Also, what promises will be implemented? Michael Krukones, author of Promises and Performance has analyzed 70 years of presidential campaign promises and found that approximately 75% of promises on the campaign trail are kept to some degree. Therefore, the efficacy of Trump’s policies is dependent on whether congress is willing to cooperate and whether the proposals are legitimate or simply ‘election promises' to win votes. Markets would also likely prefer a split Congress to provide balance, despite the risk of gridlock. Overall, investments decisions based on geopolitical or political issues have historically resulted in poor outcomes. Following the presidential election, we should remind ourselves that portfolio returns will ultimately be driven by company specifics fundamentals and valuations.
If you have questions about your investment strategy going forward or would like to have a portfolio review, please contact me today.
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