With the US presidential election just four months away, global markets are on an edge. RHB Research penned five scenarios that might unfold if Trump is re-elected. We have adapted it for this article and suggested two more if Harris wins! The potential scenarios; the actual outcomes could differ and may offer opportunities for change and adaptation.
Scenario 1: China tensions and negative spill over to Asean
Central to Trump’s approach is a robust stance on US-China relations, marked by escalating tariffs that have significant implications for global investors. Historical data indicates that tariffs implemented during Trump’s tenure shaved off 0.1% of global growth in 2018, escalating to 1.4% by 2020.
Source: https://en.wikipedia.org
His latest proposal includes a blanket 10% import tariff, coupled with intensified rates targeting China specifically. This move is expected to drive US headline inflation to 4% by 2025, up from the current 3%.
Such measures could disrupt global trade flows and industrial progress over the long term.
On the other hand, a Democrat victory might temper tensions, offering hope for the future of US-China relations.
Trump’s proposed tariff hikes on Chinese imports, particularly in sectors like new-energy vehicles and semiconductors, underscore a persistent strain in US-China relations. This geopolitical friction is poised to sway investor sentiment, favouring developed market equities at the expense of emerging markets.
Scenario 2: Rate cuts in deference to political pressures
If Trump wins, the US’ real rates could sharply decline as he may influence the Federal Reserve for substantial rate cuts. He cites competitive disadvantages and favourable inflation conditions.
Market expectations are strong for Federal Funds Rate cuts in 2024 and 2025, with implications including a rally in US-centric equities, potentially 15% to 20% gains in 2025, and a bull-steepening bias in the US Treasury’s two to 10-year spread.
Global central banks, particularly the European Central Bank, will likely align with Federal Open Market Committee (FOMC) cuts, while Asean-centric rates face downward pressure.
The US Dollar Index is anticipated to soften below 100 by the first half of 2025, influenced by reduced carry advantages and yield-chasing behaviour favouring higher-yield assets.
Scenario 3: Stronger global drive to de-dollarize
In the context of a potential Trump presidency, his proposed tariffs to curb global economic growth could significantly hasten the global trend towards de-dollarization.
This shift might expedite the emergence of a new trade currency by 2025, with BRICS nations (Brazil, Russia, India and China) actively exploring the creation of a reserve currency backed by their own currencies.
This potential shift towards a new trade currency could open up new opportunities for growth and development, particularly in Asia and Asean.
Scenario 4: Increased geopolitically driven sentiments
Increased geopolitical noise appears to be driven more by geopolitical factors rather than purely economic ones, focusing on two critical issues:
• The US potentially demanding payment from Taiwan for military protection.
• The risk of halting military aid to Ukraine.
Both could heighten global uncertainties and dampen investor risk appetite in a Trump presidency.
Scenario 5: Division of world order
Trump’s foreign policy rhetoric is stirring concerns about strained US alliances and potential economic isolationism, prompting trading partners to seek alternatives to traditional US economic ties.
Establishing trade and economic zones like the Regional Comprehensive Economic Partnership, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, the European Union, and North Atlantic Treaty Organisation (Nato) reflects global efforts toward bifurcation into distinct orders amid geopolitical tensions and the pursuit of economic resilience.
Trump’s emphasis on economic isolationism and scepticism towards alliances such as Nato risks widening political divisions with US allies and could drive the formation of separate trade blocs globally.
Overall, Trump’s key trade ideas for a win are to:
• Long developed market-equities, especially US-centric
• Short on US dollar index
• Buy US Treasury on dips.
Expect higher market volatility over the next four months, with the US FOMC likely to refrain from cutting rates until year end.
Scenario 6: Harris victory and more of the same?
A Harris victory on the other hand will mean a higher tension in Ukraine, Taiwan and the Middle East. The military industrial complex will most certainly want wars! U.S. will try to assert itself as the unipolar power in the world and cast Russia, China, North Korea and Iran as the axis of evil.
Higher inflation, increase in interest rates, higher unemployment and lower U.S. growth rate will be the key features. Equities will tank and domestic U.S. economy may go into stagflation or tailspin/downward.
Scenario 7: Enlightened Harris
A more enlightened Harris scenario is a pragmatic end to wars and a peaceful resolution to conflicts. A focused growth in green projects (in the U.S.), higher budget for space ventures, continued spending on infrastructure and a more equitable and egalitarian economy.
Interest rates are cut progressively with receding inflation and more activity will arise in the equities market. All that will satisfy the middle class but not the top 1% wealth holders.
For us in Malaysia, we need some sound macroeconomic policies from the U.S., not more war-mongering! Anything in this regard will benefit us with higher semiconductor output and better services growth.
Reference:
Five scenarios that may happen from Trump 2.0, Barnabas Gan, The Star, 24 July 2024
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