While a new US president always looks to make changes, Donald Trump is likely to do so on an unprecedented scale. Although there are no certainties as to exactly what his policies will be, or what effect they will have on the world economy, change is very much in the air for UK investors. Here’s how things could play out under President Trump versus the status quo under President Obama.
A successful era
Under Obama, the US economy has improved significantly. When he entered office, the country was in the middle of its biggest financial crisis since the Great Depression. This clearly impacted the world economy in a negative way and caused the FTSE 100 to collapse. President Obama has been able to deal with the economic difficulties posed by the credit crunch, with a stimulus programme having a positive impact on the US (and global) economy.
His policies have created jobs, improved confidence and during the last eight years, the FTSE 100 and other major stock markets have risen significantly. Of course, some of those gains are also down to the monetary policies pursued by the Federal Reserve and the Bank of England, while the UK’s coalition government deserves credit for improving the strength of the UK economy. However, it seems clear that under Obama life has been pretty good for UK investors.
Above all else, it could be argued that he’s provided a steady hand during a difficult period for the world economy. This has allowed confidence to return to investors across the globe and helped to push asset prices higher.
A new era
That era has now ended. Under a new US commander-in-chief the world economy’s future seems much more uncertain. Although Trump has hinted at what his economic policies might be, there’s no certainty as to exactly what will happen. However, it can be reasonably argued that he will spend more and tax less. This has been a key part of his election campaign and he looks set to follow through with it.
A consequence of this policy could be higher inflation. Under Obama, the world has endured a deflationary cycle that has allowed interest rates to remain low. The effect of Trump’s fiscal policy could be a spike in prices, leading to higher interest rates in the US. This may cause global inflation levels to increase and spur tighter monetary policies across the globe. The result of this could be reduced economic growth levels.
In addition, the uncertainty brought about by Trump’s presidency could cause an increasingly risk-off attitude among investors, with his lack of political experience possibly reducing confidence among them globally. This could cause the FTSE 100 to fall in the short run, especially since it has risen sharply in recent months.
Of course, in the long run Trump’s economic policies could stimulate growth and push the index higher. But in the coming months it would be unsurprising if the UK’s index declined as a higher degree of risk is priced-in by investors.
