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The link between Trumpconomics & Australia - What the markets must figure out?


Financial Insights Australia FIA 30th of Nov 2016 group discussion take-outs

With noise, politics and drama taking center stage and blurring the big picture during this controversial US election, we conducted impartial research and subsequently held a group presentation and discussion session with financial professionals and avid investors to get insight that could help us see through the media clutter and visualize possible market implications for Australia under Trump’s proposed policies.

THE PERCEIVED KEY QUESTIONS FOR AUSTRALIA IN LIGHT OF TRUMPCONOMICS:

1) If the US was to impose trade tariffs on China, would China devalue the Yuan? What would the implications be for Australia?

2) Could the US abandon the Trans Pacific Partnership (TPP) agreement? What is at stake for Australia?

3) Can we expect more economic activity in the US during 2017? If so would this actually translate into more demand for Australian goods and services?

4)Why corporate tax cuts might not longer be as effective in boosting economic activity in today's modern environment?

THE U.S. & AUSTRALIA TRADE RELATIONSHIP:

While Australia is a minor trading partner for the United States, the U.S. is the 2nd biggest trading partner for Australia. Trade in both terms of import and export have been rising through the years.

Australian exports to the U.S. constitute around 21% of GDP making Australia particularly vulnerable if Trump was to impose high trade tariffs and quotas.

Will things change in a positive or negative direction under Trump’s presidency?

TARIFFS & QUOTAS

Trump has suggested imposing 45% trade tariffs on Chinese imports, instructing the Treasury Secretary to label China as a currency manipulator and bring trade cases against China, both in the US and at the WTO.

1) If the US was to impose trade tariffs on China would China devalue the Yuan? What would be the implications for Australia?

Would the US impose tariffs on China?

Given that China, Canada and Mexico are the main trading partners of the US it is perceived that imposing tariffs of this scale would increase import costs for the US subsequently resulting in inflationary pressures. This in turn would suggest that it would seem unlikely for tariffs of this magnitude to be implemented by the US Yet if it was the case that would lead us to the following question:

Could trade tariffs trigger China to devalue the Yuan?

China has been accused of manipulating their currency in multiple occasions to boost exports in the past and in recent years as its GDP growth has been declining.

The implications of a lower Yuan/Renminbi for Australia?

A lower Yuan poses significant challenges for the Australian resources sector and the overall economy as the mining industry backed by Chinese demand has been one of the main economic drivers for Australia.

We don’t have to go too far back in time to see how sensitive Australian markets are about a sudden depreciation of the Yuan. The sudden depreciation of the Yuan in 2015 proved to be of more concern and more volatile for Australian markets than the Brexit and the US elections.

We saw a quick sell of mining and resource companies in Australia. More expensive Australian commodity and resource prices from a Chinese standpoint translate into less demand hence smaller cash flows for Australian companies in these sectors.

These movements by implication brought an immediate ASX correction of about 1.7 % lower at 5,382, and the broader All Ordinaries fell 90 points to 5,384.

The Australian dollar fell as much as 1 percent to touch a six-year low of $0.7216, while the New Zealand dollar eased 0.6 percent to trade at its lowest since July 2009 against the US dollar.

Southeast Asian currencies were similarly scared; the Singapore dollar dropped to a five-year low of 1.41, while the Indonesian rupiah and Malaysian ringgit reached lows unseen since the Asian Financial Crisis (AFC) in 1998.

THE TRANSPACIFIC PARTNERSHIP AGREEMENT TPP

Trump has suggested that he will withdraw from the Trans-Pacific Partnership, which has not yet been ratified

2) Could the US abandon the Trans Pacific Partnership TPP agreement? What is at stake for Australia?

The TPP negotiations are highly beneficial for Australia as it is the first concrete step towards realizing the long-term vision of a Free Trade Area across the Asia-Pacific.

There are over 12 countries negotiating the agreement including – Australia - Brunei Darussalam – Canada – Chile - Japan - Malaysia - Mexico - New Zealand – Peru - Singapore - The United States - Vietnam

70% of Australia's trade flows through this region.

44% of all Australian outward investments was within the TPP region in 2015

$105 billion of Australia’s goods and services exports was estimated to flow into these region in 2015 – a third of Australia’s total exports.

It is estimated that the TPP would eliminate more than 98% of tariffs in the TPP region with a value estimated around US$9 billion worth of tariffs for Australia’s dutiable exports.

U.S. ECONOMIC ACTIVITY

Whether Trump policies will boost the US economy or will derail it into recession has proven highly controversial. Under the magnifying glass is the possible impact behind the proposed corporate and income tax cuts and whether they will translate into more economic activity.

3) Can we expect more economic activity in the US during 2017? If so would this actually translate into more demand for Australian goods and services?

We found view points and research on both sides of the fence. Some backing the view of a more prosperous United States of America in store for 2017 and others predicting a recession to take place.

However we also found corporate tax cut scenarios that took place in the past in economies such as Canada and Australia where corporate tax reductions didn’t translate into the expected economic activity and business investment.

A Warning From Canada: How Cutting Corporate Tax Did More Harm Than Good https://goo.gl/T6jMwx

In order for there to be more economic activity resources need to be employed more effectively. Will tax cuts lead to more jobs?

Using the tax cuts granted during the 2008 financial crisis as reference point we can see that this isn't always the case. Businesses saved or used money from the Bush tax cuts and the TARP bailouts to send it out to stockholders as dividends, repurchase their stock or invest overseas. None of those activities created the jobs needed to boost the economy.

THE CHALLENGE THAT COMES WITH TECHNOLOGY

4)Why corporate tax cuts might not longer be as effective in boosting economic activity in today's modern environment?

Economies have turned more technology-intensive than labor intensive. Businesses are more likely to use tax cuts to buy computers and other labor-saving equipment than to create new employment opportunities.

Article by Carlos Mauleon - Business Strategy & New Business Initiatives (Financial Services) at Biznex Consulting

We love insights let us know what you perceive are the main challenges and opportunities in store for Australia during 2017

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