Trump impact = ripple or tsunami?
It has now been only a few weeks since the US public went to the polls to elect their next President. The surprise winner – Donald John Trump (see you already know something you did not know a minute ago) : – ).
I am a US Citizen but also a permanent resident of Australia, along with being a buyers agent at Crave, so I took a high level of interest in following this election. And it has been like no other in history…
Never has there been so much media attention on campaign. Or mud slinging. Or fake news. Or bad behavior – often in a candidate’s own words – shown to the voters. But at the end of they day, the bad stuff just did not matter.
Key voters in US swing states (Pennsylvania, Wisconsin, Ohio, North Carolina and Florida in particular) voted for Trump and his message of economic change. This includes the big ticket items of tighter immigration, less regulation, major tax cuts, a replacement for Obamacare, and an aggressive trade policy using tariffs, if required, to help level out US trade imbalances.
I’m not going to get into what was said during the campaign. I think much of it no longer matters. What is important is what this new President will do in terms of actions and policies.
Fun times for the stock market
The US stock market did not react favorably on the surprise Trump win, plummeting nearly 800 points in after market futures trading on fears of a brewing trade war. But the decline quickly ended as saner minds on Wall Street weighed in with bets that Trump’s campaign rhetoric would now give way to a more moderate way of governing. Today the Dow Jones sits at 18867, up 1000 points from its close on Friday Nov. 5th the day after the election. Carl Icahn, a famous company raider and billionaire, said he bought $1 billion in stocks during the stock market plunge.
Impacts for Australia
So what does any of this mean to us in Australia, especially the property investors and future home buyers out there who want know what they should be doing? Panic and sell the portfolio? Buy on dips? Or ignore all that has happened and proceed along on their plans?
I tend to fall in the camp of the latter. It is unlikely that Trump’s election will have much of a direct effect on us in Australia any time soon. However, there is one area to watch – INTEREST RATES.
Our bond and currency markets are very quick adjusters when they get new news. They trade based on making bets on the future. And they are betting that Trump is going to create a lot of additional inflation that will be matched with global interest rate hikes.
We can see evidence of that already in US long term Treasury bills which now carry an interest rate 0.5% higher than before Trump got elected. Effectively, two Fed rate hikes factored in by the market within two weeks.
We attended a Macquarie economic forecasting seminar recently and heard a common theme. This great world experiment with negative real interest rates is quickly coming to end. They also told attendees that professional money is already CASHED UP and ready to jump on opportunities. There was little fear that Trump would actually start a trade war with China in particular. But they were certain that Trump would spend big on INFRASTRUCTURE.
And what country does well when the world builds big things? AUSTRALIA. Largely due to our large export base in commodities like iron ore.
So what do we have so far? Higher world economic growth. Some risk of trade wars (though not a certainty and definitely down the road) along with higher interest rates in the US, in Europe and eventually here in Australia.
Have you spoken to your mortgage broker, one of your key advisors, since Trump won? I have – several times now – as I am evaluating making fixed rate decisions on my loan portfolio. Just be careful in fixing, as one of the banks’ most profitable features on their loans are the high break fees you will pay if you have to break a fixed rate term (for example, to sell a property or just refinance).
The local impacts
So, how about the Australian property market in general? Well, rising interest rates have caused stress for property owners in the past. It may be a while before this happens, and perhaps rates will not rise enough to cause many sell decisions given the padding APRA had built into the approval process recently. But if rates do rise significantly, are you in a position to buy your next property? If you are now, how will you be if interest rates are 1% or more higher?
Bottom line here – we think Trump’s election will have only a marginal effect on the ‘Lucky Country’. We are still way more at risk from a future China slowdown, although that seems to currently be managed quite well.
Whether it’s the Trump impact or some other event, the best approach is to be organized and get your plan together for 2017. Have buffers in place for interest rate hikes. Speak to your mortgage broker and potentially fix some of your loans if you value the interest rate certainty and understand the costs.
There is one upside for Australian property here that I have not mentioned – over 60M American voters did not vote for Trump. Many have said they will move out of the country and Australia is looking like an attractive option for them – ha ha.
Seriously, Harrison Ford just bought a place in Hervey Bay. I’ll look forward to providing you with a further update in our next newsletter.
Scott has more than 20 years’ experience in the Australian and United States property markets. Scott holds a Bachelor of Science in Economics from MIT and has previously worked in management consulting and corporate strategy.
He is also a licenced real estate agent. A self-confessed property tragic, Scott has renovated properties, including his family home in Balmain, while continuing to build his portfolio. Scott is a fantastic property ‘numbers’ man, enjoys evaluating a variety of property strategies to find the ones most suited to his clients, and has a great understanding of the ‘new’ property space.
Disclaimer – This information is of a general nature only and does not constitute professional advice. We strongly recommend you seek your own professional advice in relation to your particular circumstances.