New US President Donald Trump’s actions so far make it tricky for planners to educate clients. However, there will be both opportunities and threats as his administration progresses.
To be able to inform clients about Trump’s potential impact on investment markets, it’s important first to understand the extent of his power.
David Smith, senior lecturer in American politics and foreign policy at The University of Sydney, explains Congress, the judiciary and the law can limit the president’s power.
“The first executive order Trump drew up about immigration ignored legal advice, didn’t consult with any of the departments involved and had nothing to do with Congress,” Smith explains.
Last week, Trump banned immigrants from seven predominantly Muslim countries from entering the US.
“Even though federal judges said parts of it were illegal and put a stay on it, customs agents were still carrying out the executive order,” Smith says. “This is the start of a pattern we’re going to see of Trump testing how much power he has.”
Smith says the fact Congress controls the national purse strings limits Trump and his ability to undertake major initiatives, such as big infrastructure projects.
“It’s to Trump’s advantage both houses are controlled by Republicans, and it’s the House of Representatives that deals [first] with budgetary issues. There are many Republicans who are very loyal to him, especially in the House of Representatives.
“Because Trump is so popular among the Republican base, even if he’s not very popular with anybody else, congressional representatives will be worried about opposing him on anything.”
However, senior Republican Party members in Congress, such as John McCain and Lindsey Graham, have come out against the immigration ban. Says Smith: “Given that the Republican majority [in the upper house of Congress, the Senate] is only 52 to 48, Trump will need to keep those senators onside to get anything done.”
He also faces the problem of the filibuster, a tool the minority party in the Senate can use to delay legislation, often indefinitely. Republicans used this frequently against Obama. However, the US is a federated system and the states and cities have substantial power. Democrats control some of the biggest states and nearly all of the biggest cities in the country.
“It’s quite likely this will also provide brakes on Trump’s power,” Smith says.
The federal judiciary is also likely to try to thwart Trump. He will hope cases go to the Supreme Court, which will [soon] have a conservative majority, and that the Supreme Court will agree with him. But Smith says Trump’s reckless behaviour puts him in danger of putting conservative justices in the Supreme Court offside.
“It’s never a fixed matter of how much power the president has,” Smith explains. “It depends on whether people are prepared to resist. This is what Trump is testing.”
Robert Lipman, executive chair of financial advice firm Lipman Burgon & Partners, says Trump’s ascendancy to the US presidency requires ongoing communication with clients.
“His policies have been outlined and that should be communicated,” Lipman says. “Over time, we’ll get further clarification on what they’re going to do with the tax system and trade tariffs. It’s necessary to communicate on an ongoing basis exactly what is being done and translate that into an effect on the local markets, and how clients should act to benefit from changes.”
Lipman has already outlined some major implications from Trump’s election for his clients. For example, a new tax system could cause the US dollar to rise.
“This would have major benefits for US exporters, but hurt importers and would be tax neutral for domestic suppliers,” he explains. “If that were to transpire, the US dollar could appreciate by roughly 15 per cent. That would have implications for Australians who are investing internationally.”
For instance, investors in international assets on an unhedged currency basis would benefit if the Aussie dollar weakens concurrently with the US dollar. So having US dollar exposure in this situation could be useful.
Lipman’s advice for advisers is to concentrate on the fundamentals of the local market, rather than trying to develop a strategy for what could transpire under the Trump presidency.
“The US market was expensive prior to Trump’s election and has subsequently further appreciated, putting [it] into overbought territory,” he says. “Over the past 12 months, the market has moved from a mood of quite severe pessimism to a mode of euphoria. We may consider reducing clients’ US dollar exposures back to benchmark or below benchmark, rather than suffer what could be a short-term weakening in the US sharemarket.”
Regardless of Trump’s policy, the message for advisers is to remain focused on clients’ investment strategies and goals, keeping an eye on Australian market fundamentals and global events.
