There will be three likely impacts for SMSF investors or investors generally as a result of Donald Trump being elected United States president: commodity price rises, higher inflation and a lower Australian dollar.
Such a Republican victory would normally be welcomed by markets, giving rise to legislative certainty from a pro-business, smaller government and strong military platform. Such is the maverick nature of Trump, the market is yet to comprehend the implications. So what are the issues before us and their implications under a Trump presidency? One thing we would very strongly caution against is throwing the baby out with the bathwater. Putting aside certain controversial Republican social policies, the economic implications on calm reflection are probably less troubling.
1. Commodity price rises
Trump appears likely to take a leaf from the Reagan economic management playbook and implement a combination of big tax cuts, increased defence budgets and $1 trillion in infrastructure spending that should provide a boost to the US economy in the short term.
What investors should consider
The additional demand for raw materials required for infrastructure projects provides an opportunity for Australia-based SMSF investors to reposition their portfolios to increase their exposure to miners, rail companies and service providers that have been shunned due to lower commodity prices in 2016, and away from bond proxies such as real estate investment trusts or utilities.
2. Higher inflation
Looking further ahead, the increased fiscal spending on infrastructure during a time of historically low unemployment combined with proposed protectionist tariffs would likely drive higher wages and consumer prices. The result would most likely be higher inflation and accelerated interest rate rises by the US Fed.
What investors should consider
If inflation rises, SMSF investors should look to guard the purchasing power of their nest egg against the eroding effects of inflation. Possible actions would include reducing exposure to traditional fixed-rate bonds, investing in gold or gold producers and/or purchasing bonds that are indexed to inflation.
3. Currency exposure
This is a mixed bag. Currently the commodity currencies (including Australia and Canada) are trading down against the US dollar. The safe haven currencies (yen, Swiss franc, euro) are trading up against the greenback. The best that can be said is that there is likely to be downward pressure on the Australian dollar in the near term.
If higher interest rates eventuate in the US, this will likely drive further strength in the US dollar against most other major currencies.
What investors should consider
SMSF investors are typically overweight Australian dollar-denominated investments and, conversely, underweight international equities. With the Australian dollar expected to incur some weakness in the short to medium term, now would be the time to address any portfolio imbalances and maintain purchasing power.