US elections 2024: The Investec view

A Trump presidency doesn’t bode well for the rand

• The rand has seen weakness on a rise in global risk aversion ahead of the US elections

  The rand has averaged R17.53/USD so far this quarter, on the back foot as global risk aversion has lifted in the run-up to the US election, as well as on the escalation in geopolitical tensions, weak global production and a moderation in US dovishness. 
  

  In particular, the rand recently has lost ground on gains made by ex-President Donald Trump in some recent surveys on the upcoming US election on concerns of increased protectionism, as tariffs and sanctions are expected to rise.

  The rand in general could be expected to be weaker under a Trump Presidency. SA has come under fire before from US tariffs when Trump was in the Whitehouse, while global economic growth and risk aversion was negatively impacted.

  According to Bloomberg, “The former president has touted baseline 20% tariffs on all imports, and as much as 60% if they come from China. Harris hasn’t signalled any major departure from the trade policies of the Biden administration”. The expected case is a Harris win.

  Read Annabel's weekly Rand Note here and her regular economic updates here.

The "Grand Old Party" will regain control of the Senate

• If Trump wins but falls short of a clean sweep of the House, his ability to cut taxes could be limited, although he could well still raise tariffs aggressively.

  As the 5 November elections approach, Donald Trump has enjoyed positive momentum in the polls recently and leads Kamala Harris in most of the swing states, although these findings are well within the margin of polling error and could still change over the final two weeks.  

  There’s a risk to the interest rate outlook that comes from uncertainty surrounding the US election and the policies of both candidates. Trump has proposed a protectionist trade policy of a universal tariff on most foreign goods of c.10% and additional higher tariffs on Chinese goods. Clearly this poses inflationary risks. 

  On taxation, Trump has promised to extend his 2017 Tax Cuts and Jobs Act (TCJA) whilst pledging to cut the corporate tax rate to 15% on some companies, in addition to new exemptions by not taxing wages on tips and Social Security benefits. 

  Also planning to increase government spending, Harris has pledged to cut taxes for middle and low-income families, combatting price ‘gouging’ and new tax credits to aid first-time buyers as well as an expansion of the annual child tax credit.

  Our forecasts are based on a broad continuation of the current stance of fiscal policy. From the perspective of the elections, this would be consistent with a Harris victory or perhaps also Trump winning but falling short of a clean sweep of the Senate and the House. 

  In the latter case, his ability to cut taxes could be limited, although he could well still raise tariffs aggressively. 

  It is important to note that it is the Electoral College (EC) arithmetic that matters and in practice, the results in seven swing states.  

  The outcome looks really too close to call, as does the control of the House. We still suspect that the “Grand Old Party" (the Republicans) will regain control of the Senate, albeit perhaps narrowly.

  The Trump Trade

  With a Trump win a distinct possibility, we would highlight these market possibilities:

  A stronger USD 

  At least in the short-term, we would expect the US dollar to strengthen on a Trump victory, this being a function of his stated reflationary economic and protectionist policies, which would run the risk of the Fed taking a more cautious approach to monetary policy. 

  Perhaps ironically the prospect of a trade war could also boost the allure of the USD’s safe-haven status. To note in 2016 the USD strengthened 5% by the end of the year. But the dollar’s strength did not last, falling 9% in 2017.

  A risk that could upend a stronger USD would be if Trump attempted to interfere with the Fed’s independence. Certainly, recent examples of governments encroaching on monetary policy (e.g. Turkey, Brazil) have not boded well for those currencies.

  US Treasuries feel the pinch

  We would expect US Treasuries to come under pressure given the implications for Fed policy and inflation, but also on supply. This is due to what is expected to be a marked deterioration in the US fiscal position and striking rise in debt under Trump. For example, a Committee for a Responsible Federal Budget (CRFB) study estimated that Trump policies would add $7.5trn to US debt by 2035, increasing the debt % GDP ratio to 142%.

  Equities will benefit

  Equities would likely get a boost from Trump, as seen in 2016 given business-friendly policies such as corporate tax cuts.

  Geopolitics at play

  Geopolitics poses a risk to the US election result and the world economy. At the time of writing there remained concern over Israel’s likely response to Iran’s attack on 1 Oct. 

  Markets have focused on the risk of an Israeli strike on Iranian energy infrastructure and the consequential impact on Iranian supply, potential Iranian retaliation against energy facilities in the Gulf states, and the risk that Iran attempts to close the Strait of Hormuz, which transits c.20% of global oil and related crude oil, condensate and petroleum products. 

  Oil prices have eased from a peak of $81/bbl, but there remains a risk that a high oil price scenario plays out given the unpredictable nature of the conflict. A major pre-election spike in oil prices would likely play into Trump’s hands, strengthening the dollar on both political considerations and safe haven buying.

  We also have not made any material changes to our world growth forecasts which stand at 3.2% this year and next. However, we note that risks to global momentum are starting to materialise. 

  Uncertainty surrounding the US election and the potential for heightened barriers to trade if Trump were to win the presidency would be a drag on exporting economies such as the Eurozone.

  Get more insights from Investec’s London Economics team in their latest Global Economic Overview.

   

If Trump wins, we're unlikely to see the same sort of rally we saw when he won in 2016

• There's a big difference between the market conditions now and 2016 when Trump was last elected

  Trump's in the lead, but the lead is insufficient to say with certainty that he’s going to come through. There's a big difference between the market conditions now and 2016. When Trump was last elected, the US market was on a much lower PE than it currently trades at, and higher yield spreads are much higher than they currently are at the moment. 

  There's much less margin of safety in the US market and less space for a valuation re-rating, and as a result, even if it is the case that Trump comes through, you wouldn't expect to see the same sort of market response that we saw in 2016. 

  Just as a starting point, valuation is much more stretched. But in addition, there was a big reduction to taxes when Trump came through originally. Those taxes are low. It's very difficult to see a further reduction of current levels. 

  In addition to that, there are some concerns. Irrespective of which candidate wins, we're likely to see a fairly sizable upward revision to the debt-to-GDP trajectory. And this is an issue that is going to have to be resolved at some point in the next five or six years or so. 

  The reality is the US government is running very large deficits. In an environment where debt-to-GDP is already elevated and it is a matter of time before a risk premium starts to be attached unless something is done in the next five or six years, and that could be increasing taxes, it could be reducing expenditure, it could be ultimately landing up with lower rates through the Fed.

  We're not sure which of those outcomes is likely to pan out but we do know that it is a building issue and in three or four years, this is going to be extremely topical. Unless something's addressed, but neither candidate is putting forward a proposal that is likely to see the debt-to-GDP trajectory come down.

  So in aggregate it looks like Trump at the moment has got his nose in front, he's more likely to win, but even if he does come through we're unlikely to see the same sort of rally we saw the last time he came through, and there is this GDP issue, which is in place, irrespective of which candidates comes through.

  For more insights from Chris Holdsworth, tune in to Macro Monday for a weekly market update.

A Trump win will not be first prize for a broader emerging market narrative

• The impact of de-globalisation on emerging markets

  I continue to believe that a Trump victory will accelerate [President of the European Central Bank] Christine Lagarde’s base case that; “We are witnessing a fragmentation of the global economy into competing blocs, with each bloc trying to pull as much of the rest of the world closer to its respective strategic interests and shared values”. This theme, coupled with another round of substantial China tariff increases to offset domestic largess/tax cuts, must be inflationary.

  The combination of the above is clearly not first prize for a broader emerging market narrative that was building up a head of steam.
  

  An incredibly fluid situation in the Middle East adding to the substantial macro cross-currents.
  

  South Africa is a market is desperate need of substantial rate cuts. The consumer is under acute pressure and the huge real rates on offer continue to provide substantial opportunity cost to investing in productive assets that are key to stimulating growth and addressing unemployment
  

  The macro narrative framed above forces one to question the depth of this cutting cycle. It also means that the bull case for South Africa is more reliant on an acceleration of bottom-up reform. We ascribe a much higher probability of this materialising, but it’s not without risk…
  

Trump 2.0: Implications for China

• China has increased supply chain diversification, pivoting exports away from the developed world to emerging markets

  Trump has proposed a significant tariff on all Chinese goods, as well as a tariff of at least 10% on US imports, which could trigger new trade wars not only with China, but also with Europe and Asia. Tariff wars will weigh on global economic sentiment and lead to increased volatility.

  Should President Trump introduce a tariff on all US imports as proposed, all US trading partners may raise tariff and non-tariff barriers on imports from the United States in the simulated scenario. In such a scenario, China may be a net beneficiary as Chinese producers may improve their competitiveness in third countries vis-à-vis US producers.
  

  Despite increasing trade tensions, China has significantly increased its share of global exports in recent years. China has also increased supply chain diversification, pivoting exports away from the developed world to emerging markets. EM countries may be benefitting from trade friction between the US and China.
  

  Chinese companies are increasingly investing in the electric vehicle (EVs) eco-system, as evidenced in Chinese companies investing in 90% of nickel (a key component of EV batteries) smelters in Indonesia.
  

  Chinese auto companies, including BYD and Great Wall Motor (GWM), are investing in EV auto production as well as lithium mining assets in Brazil.
  

  Nonetheless, it appears less likely to us that China shall meet their real GDP growth target. China may struggle to export its way out of its woes either, amidst an international backdrop of relatively subdued global demand and the rise in protectionism. We believe that geopolitics may cap further upside in Chinese equity markets. 
  

Whoever wins, US oil output is likely to increase

• The US is the world’s largest producer of petroleum, accounting for around double the output of Saudi Arabia or Russia, so its energy policy is hugely important for markets.

  Leaving aside developments in the Middle East, the key challenge for oil markets is weak demand growth, which is expected to be outpaced by non-OPEC supply growth next year, driven by the US. 

  There are parallels with 2014 when OPEC abandoned attempts to balance the market at prices that were providing an excellent environment for US supply growth.  The price of oil fell sharply as the market was left to balance itself.
  

  The US is the world’s largest producer of petroleum, accounting for around double the output of Saudi Arabia or Russia, so its energy policy is hugely important for markets. 
  

  Harris has been keen to correct an impression that she was opposed to fracking and while Trump is generally seen as being more positively disposed to oil than Harris, both appear keen to support the domestic oil industry. 
  

  Their views on energy policy do diverge where support for the energy transition via the inflation reduction act is concerned and on commitments to emission reductions – for example, Trump says he will pull out of the Paris agreement (again). 
  

  For oil though, whoever wins, US oil output is likely to increase and unless OPEC+ is prepared to cut output further, the market may need to fall to a level that disincentivise non-OPEC supply growth, just as it did in late 2014.
  

  Listen to Callum’s weekly Energy Market podcast for more insights.