Trump victory may lead to a global trade war: AMP Capital

Riding in close on the heels of US Federal Reserve saying on Thursday that higher inflation strengthens case for a rate hike, AMP Capital Investors too believes that a rate hike is on the cards in December.

Besides, the US Presidential elections too are likely to impact markets even though the markets are factoring a 50 percent chance of Donald Trump winning the polls, said Shane Oliver of AMP Capital Advisors. He warned of a downside risk to markets if Trump becomes US President.

Trump's economic policies will go down badly with investors, Oliver said, adding that a Trump victory may lead to a global trade war. He advised investors that once the elections are out of the way, the market may offer a good buying opportunity for investors.Below is the transcript of Shane Oliver’s interview to Latha Venkatesh, Sonia Shenoy and Anuj Singhal on CNBC-TV18.Latha: First let us dismiss the Federal Open Market Committee (FOMC) statement with a comment. Do you think there are hints that they will move in December? Is it now a given?A: It is pretty much given and that is why the US money market is factoring close to an 80 percent probability of a move in December. The key comment in there was along the lines of the coach for another interest rates increase. So, unless we see some sort of shock between now and December, then the Fed will raise interest rates.Sonia: But what about the bigger trigger, the US elections? The Standard and Poor's (S&P) 500 has been falling for seven straight sessions now. Do you see more downside in the US markets in the run up to the elections?A: That is a good question and of course, this is one shock that might derail the Fed from hiking in December. A Trump election might do that. And the reason this is a concern is because Trump is large unknown. Some of his economic policies sound sensible and almost as if they were borrowed from Ronald Reagan, the President from the 1980’s. The tax cuts, deregulations and that sort of stuff. But his policies on trade, protectionism would go down very badly with investors. And so investors are naturally worried that he might trip off a global trade war which the 1930’s tells us finally ending deeper in a recession at least and will not do any good for company profits, let alone, even on growth. That is why share markets have started to fall.Latha: The fall in the markets of course, is probably a given if Trump gets elected, but as we were discussing just a few minutes before we got you on phone, from Brexit and even earlier, every global dip has been an occasion to buy. Will it be different this time?A: This time I would probably say no. I think if he wins, we would probably see more weakness in share markets. If he wins then there is probably more downside to go. There could be another 4-5 percent downside in the US share market. Ultimately, as we saw with Brexit, that would prove to be a buying opportunity because initially investors would be prepared to discount the trade war risk and focus more on the tax cutting policy, the infrastructure spending and so on and they might take that as a positive and wait and see what happens in terms of protectionism, maybe hoping that Congress will limit his plans on that front. Therefore, I tend to say this is a bit like Brexit, with the sell-off running into it which is probably a healthy thing. Brexit actually shows we are rallying into Brexit having sold off afterwards, so they had to catch up. But this time around, the markets have already factored in some risk and then within a few days, you would probably see a good buying opportunity, maybe later next week or after the election is out of the way. Now of course, if Clinton wins the election then you might want to be buying before we know the result, because if she wins, I think it will be a big relief coming out of US.Anuj: We have seen a bit of an outflow from foreign funds in India and rest of the emerging markets as well. Do you think we are on course for a bit of an underperformance of emerging markets?A: A little bit. We saw last year when the Fed was moving towards raising interest rates that that pushed the US dollar up and led to some capital outflow from the emerging worlds and of course, when US dollar goes high, there is always this worry that some emerging country will default on its US dollar denominated dip, it will be a bit of a dollar funding crisis and maybe you are seeing a bit of that at the moment. But at the end of the day, things are a lot different to a year ago, things are a lot stronger than then. So, even if we do get a further dip in emerging market share prices, we are in a better state that we were a year ago. There is less uncertainty about the downward pressure on the value of Chinese currency, the risk of capital outflows in China have substantially reduced and much of the emerging world is in slightly better shape that it was a year ago. A year ago, Brazil and Russia were deep in recession whereas recently some of the emerging countries suggest that those recessions are starting to wane. There is more components about the Chinese economy, their Purchasing Managers’ Index (PMI), business surveys over the last few days actually pointing upwards. And of course, the Indian economy which is the other brick has been doing well all along anyway. So, there is not a lot of concern about Indian economy. But the overall picture in the emerging world is a lot stronger than it was a year ago. So, I can understand, while we are going through a bit of a break in emerging market shares, it might go a little bit further. But I do not see it become a rout again. The worst is probably over for the emerging worlds.