How anti-globalization trend will affect global markets

November 16, 2016 06:01
Donald Trump is widely expected to lean toward trade protectionism to shield domestic industries. Photo: Bloomberg

The surprise victory of Donald Trump in the US election might reshape the global economic and trade landscape in the next four years.

The Hong Kong market is always very sensitive to the global macro environment.

Will Trump keep his pledge to hike tariff, refuse imports that are subsidized by foreign governments and list China as a currency manipulator?

If so, will that lead to global trade contraction and economic recession?

It’s widely expected that Trump will lean toward trade protectionism to shield domestic industries.

But his stance has changed after his victory. He now claims to “seek global cooperation instead of conflict”.

Risk aversion is expected to dominate the financial market in the short term while investors wait for more clues for Trump’s actual policy measures in the medium term.

Brexit and Trump

The underlying reason behind Trump’s victory and Brexit is the same.

There is an emerging trend of anti-globalization in the mass market in response to a widening wealth gap.

Anti-globalization, tighter regulation and government intervention will increase the risk for corporations and fears about geopolitical risks will mount.

Increasing frictions in global trade will hurt investor confidence and capital spending by corporates.

That could weigh on an already sluggish global growth. Investors need to look for acceptable risk-adjusted return amid tougher political and economic conditions, according to a research report from Allianz.

Trump could shake up the global order. He is capable of overthrowing international relations as the leader of the world’s largest economy. Geopolitical risks have increased substantially.

Tax reform

Trump suggested corporate tax reform and infrastructure spending to stimulate US economic growth.

However, that might considerably increase US debt and lead to higher inflation and interest rates. That would undermine the economy in the long run.

Allianz analysts expect Trump to ask US allies to share the cost of security.

Japan and South Korea might need to share the burden of rising defense costs in Asia. In that case, military and national defense stocks might rally.

Also, they believe the US market would witness more volatility in a risk-off environment while European markets would stabilize.

Fixed-income products would be sought-after and rising bond prices would press down yields. Asian bonds will become a safe-haven while US bonds would be less attractive.

Léon Cornelissen, chief economist of Robeco, said it’s "clear US voters have chosen a candidate preaching disruption and have scoffed at continuity. It can be seen as a massive anti-establishment vote along the same lines as Brexit, where voters were basically fed up with the status quo.”

The increased uncertainty means the climate for equities will be negative for the coming weeks as investors who have to liquidate their positions under these circumstances would send asset prices down further, he said.

It’s widely believed that protectionism would plunge Asian trade and a tariff increase would harm Asian economies that are dependent on exports. Asian markets are likely to suffer.

No to status quo

There are four upcoming elections in Europe next year and more nations might look to exit the eurozone. That might revive risk-aversion sentiment in the market.

In a close analogy to Brexit, there is a widespread disenchantment across western democracies with existing policies, according to Christophe Bernard, chief economist of Vontobel Asset Management.

Anti-establishment parties in Europe should not be underestimated as French and German elections are scheduled for 2017. These social and political developments are imperfectly captured by pollsters he said.

Also, Trump intends to renegotiate key trade agreements and impose trade barriers on Mexican and Chinese imports.

This introduces a high level of uncertainty and might weigh on global economic growth, Bernard said.

This article appeared in the Hong Kong Private Banking Journal on Nov. 16

Translation by Julie Zhu

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Hong Kong Private Banking Journal 2015