POTUS 45
Investment implications of likely Trump Administration priorities
CIO Wealth Management Research
23 February 2017
Quick guide
Introduction
Foreign policy
Immigration
Foreign trade
Implication matrix
POTUS 45
The acronym POTUS
(President of the United
States) came into use
by telegraph operators
during the late 1800s.
Donald Trump is the
45th POTUS.
Below
How the Trump Doctrine changes America’s global role.
Page 3
The implications of an “America first” approach.
Page 5
National security concerns may outweigh economic
considerations.
Page 6
Pursuing “fair trade” may pose more risk than reward.
Page 12
Summarizing the likelihood and impact of potential policy
changes.
Global engagement:
Walking a fine line
Introduction
Since the day after the election, markets appear to have been bolstered by the
prospects for a pro-growth policy agenda from a business-friendly administration.
The increased likelihood of comprehensive tax reform, sweeping regulatory relief, and
targeted infrastructure spending under a Trump presidency has boosted confidence
measures and helped to drive markets to record highs.
But concerns about the new administration’s approach toward global engagement is
tempering that enthusiasm. An increasingly aggressive approach toward trade, more
restrictive immigration policies, and a shift in foreign policy priorities could undermine
the administration’s pro-growth economic agenda. Global engagement, therefore, is
the greatest source of risk for this administration, in our view, and the biggest potential threat to both growth prospects and market stability.
In this latest installment of our POTUS 45 series, we begin the discussion with an
overview of the “Trump Doctrine” for global engagement. We then assess the doctrine through three channels – foreign policy, immigration, and trade – and consider
their investment implications.
ab
This report has been prepared by UBS Financial Services Inc. Please see important disclaimer on page 14.
Introduction
A new doctrine
T
he inauguration of Donald Trump heralds
a new era in geopolitics and America’s
relationship with the rest of the world.
“America First” is now the guiding principle
for US global engagement. President Trump’s
inaugural address, in which he called for a fundamental shift in American foreign policy, was
followed by a set of corresponding executive
orders, public statements, and conversations
with foreign leaders. Collectively, these actions
reflect an emerging “Trump Doctrine” on global
engagement, one that is a clear break from US
orthodoxy of the past seven decades.
American global leadership in the post-war period
has been based on the promotion of democratic
values and open-market economies around the
world. This leadership was largely done through
work with allies and multilateral organizations set
up by the US after World War II – NATO, the EU,
the UN, the IMF, the World Bank, and the World
Trade Organization (WTO).
Video Jason Draho
discusses this report’s
highlights. Click to watch.
The Trump Doctrine is a rejection of open-ended
multilateralism, which the administration views
as obsolete and incompatible with its “America First” approach. Instead, the Trump Doc­
trine appears to be defined by two elements
– nationalism and mercantilism – raising the risk
of semi-isolationism. The common thread is that
all relationships are evaluated by an economic
“bottom line” and interactions therefore tend
to be “transactional” in nature, with American
commitments negotiated based upon tangible
and measurable benefits. Thus, instead of liberalizing trade as a means to promote broader
diplomatic goals, the doctrine views improving
the trade balance as the end goal itself, and supports using other strategic foreign policy avenues
to achieve it.
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POTUS 45 23 February 2017
With this shift in the policy approach, the
Trump administration is walking a fine line in its
engagement with other countries. Withdrawal
from multilateral organizations and existing treaties may antagonize friends and foes alike, thus
leaving the US with diminished status and the
The administration has already taken
a much harder line with trading partners
world a riskier place. The administration has
already taken a much harder line with trading
partners and has sought immigration constraints
that have engendered domestic and international anxiety.
Because US presidents have far more discretion
in the implementation of foreign policy than in
domestic policy, where the cooperation of Congress is essential, the administration’s approach
to global engagement poses the most significant policy risks. Every new administration takes
time to find its footing. The Trump presidency
has been no different in this regard. But despite
some recent missteps in the rollout of new executive orders, we believe this administration is
committed to a shift in US doctrine.
Evaluating the doctrine’s investment consequences is more complex and challenging than
it is for the administration’s pro-growth agenda.
The most immediate global engagement concern is the specter of trade wars that arise from
a hardline Trump approach. But even if cooler
heads prevail and such self-inflicted costs are
avoided, an antagonistic foreign policy can
still lead to a loss of soft power with allies and
domestic political capital. The economic costs of
these effects are indirect and subjectively measured. Yet they clearly exist and can be very significant, especially over the long term. Moreover,
all aspects of global engagement are interdependent and can’t be viewed in isolation. The same
applies to their investment implications, which
makes it difficult to draw definitive conclusions.
Foreign policy
Foreign
policy
A transactional,
nationalistic foreign policy
T
he Trump Doctrine’s implicit bet is that
rather than push away America’s traditional allies, the doctrine will bring them
to the negotiating table in order to maintain
favorable standing with the US. A shift toward a
bilateral, transactional, and nationalistic foreign
policy is already evident in the Trump administration’s engagement with its NATO partners, specifically its public pressuring of other countries
to meet their defense funding commitments,
to which they routinely fell short. This strategy
poses some risk, as other countries’ economic
self-interest and domestic political considerations
might compel them to forge new alliances.
Managing a series of bilateral relationships is
exceptionally challenging in a multi-polar world.
Multilateralism, for all its shortcomings, has contributed to geopolitical stability and economic
growth. The new administration will need to
strike just the right balance between criticizing
the multilateral organizations for their failures in
some areas without undermining them entirely.
This last point is critical as the world evolves
in geopolitical terms. The period from the end
of World War II to the fall of the Berlin Wall
occurred in a bipolar world in which the US and
the Soviet Union squared off against each other
while much of the rest of the world chose sides.
Although the two powers confronted each other
in virtually every manner – economics, social
policy, politics, culture, military – and in every
region, they never came into direct, outright
conflict. Instead, a largely rational détente based
upon the concept of “mutually assured destruction” allowed for an uneasy coexistence.
But the collapse of the Soviet Union in 1991 gave
rise to a unipolar world in which the US was able
to establish global hegemony. By doing so, the
US protected its interests, promoted its values
and, where it deemed necessary, imposed its will
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POTUS 45 23 February 2017
on much of the rest of the world. As the leading
advocate of liberal democracy and free enterprise, the US promoted democratic self-rule. Globalization flourished in this environment that the
US did much to create and sustain, resulting in a
dramatic increase in global prosperity.
Managing a series of bilateral relationships is exceptionally challenging
in a multi-polar world.
But that era is ending. The rise of new powers,
old adversaries, and rogue states dedicated to
challenging American supremacy means that
the US will be neither able nor willing to play the
same role that it has since the end of the Cold
War. Meanwhile, the impact of non-state players (such as al-Qaeda and ISIL) on the geopolitical environment is an utterly new and dangerous
dynamic.
This fracturing of the unipolar world will make
for an increasingly complex geopolitical environment. The new administration’s tendency toward
transactional engagement and relative lack of
official experience in terms of statesmanship
only serve to increase the risk of foreign policy
missteps.
Foreign policy
Foreign
policy
Foreign policy signposts
• China: Partner or competitor? The
Trump Administration may take a hardline approach regarding North Korea, the
South China Sea, Taiwan, and elsewhere,
in order to gain concessions on trade. The
strategy runs the risk of escalating into a
political stand-off, generating retaliatory
trade barriers, and enhancing China’s role
in Asia at the expense of the US.
• Russia: Ally or adversary? A rapproche-
ment with Russia, entailing reduced sanctions and cooperation in fighting ISIL,
would contradict decades of US foreign policy and reinforce a transactional
approach to global engagement. It could
risk US credibility and undermine relations
with the EU and NATO allies.
• The EU: How solid is the relationship?
Signs of tepid support for the EU and
NATO by President Trump would increase
doubts about the US commitment to
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POTUS 45 23 February 2017
multilateralism in foreign policy. Discussing
a trade deal with the UK could complicate
Brexit negotiations, further straining the
relationship between the US and the EU.
• The Middle East: Degree of reengaging
the region and allies? The Trump Administration may increase the US presence in
the region to fight ISIL. It also appears to
be renewing traditional alliances (e.g. Israel,
Saudi Arabia) after the Obama administration tried to “pivot” the US away from the
region and signed the nuclear deal with
Iran.
• Mexico: At risk of destabilizing? If the
Trump administration continues to insist
that Mexico pay for the border wall
and take a hard line on NAFTA, it could
become a destabilizing political force
ahead of Mexico’s 2018 presidential election. That would work against the administration’s interests on immigration, trade,
and the war on drugs.
Immigration
Immigration
A more restrictive and selective
immigration policy
I
mmigration has always been both a guiding principle of US global leadership and an
essential contributor to domestic economic
prosperity. From the founding of the republic, immigrants have provided the skilled, semiskilled, and unskilled labor that has driven the
greatest industrial powerhouse that the modern
world has ever known. Even in the post-industrial age, immigrants have contributed critical technical skills for the information age and
helped to usher in a fresh wave of innovation
and entrepreneurship.
But in the past two decades, there has been
a re-thinking of what US immigration policy
should look like. This conversation has obviously
been influenced by the emergence of terror
threats within the borders of developed nations.
Whether or not those who perpetrated these
attacks were radicalized, “home grown” citizens or newly arrived immigrants, the backlash
has been broad-based and pronounced. It has
led to calls for border restrictions to prevent illegal entrants and changes in immigration policy
to limit legal arrivals. President Trump’s executive orders on immigration are clearly directed
toward addressing both of these channels.
Most would agree that a careful vetting of immigrants and the active enforcement of existing
laws are both prudent and legitimate. But a
more aggressive and restrictive approach toward
immigration comes at a cost of lost production
and new business formation. The US relies on
well educated, highly skilled immigrants to fill
critical roles in industries where it maintains a
dominant leadership position, such as biomedical
engineering, advanced material design, and software development. In addition, approximately
60% of American tech firms were founded or
co-founded by individuals born outside the US.
Without those risk-taking innovators, the US is
vulnerable to falling behind other nations in an
information and talent arms race.
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POTUS 45 23 February 2017
The intangible cost
Lastly, there’s an intangible yet potentially very
significant cost to more restrictive immigration
policies. Were the US no longer seen as an open
society that embraced talent from around the
world, then capital inflows could suffer and confidence in the US as a global leader in innovation
could be shaken. With the US dependent upon the
flow of global capital and labor to sustain future
growth, a disruption of either would undermine
continued US global economic leadership.
Immigration signposts
• Deportations: Will they continue to
accelerate? A tough stance on immigration could be evident through an
increased pace of deportations of criminal aliens and undocumented workers.
• Border wall: Will it get built? President
Trump has requested funding from Congress to build the wall along the USMexico border, while demanding that
Mexico pay for it. Progress on building
the wall may just be used as a tactic to
extract other concessions from Mexico.
• Skilled workers: More or less? Broad
immigration reform is unlikely anytime
soon, but changes to the H-1B visa program are possible. Raising the requirements to obtain the visa could reduce
the number of highly skilled workers
entering the US. Over time, this could
also diminish the appeal of the US to foreign workers.
Trade policy
Trade
policy
A protectionist, and potentially
counterproductive, trade policy
I
n terms of global trade, President Trump’s criticism of US trade deficits has been perhaps his
most consistent economic position and priority. The message certainly resonates with a
large swath of the American public. Trade and
globalization are not the only causes of large
job losses, stagnant income growth, and rising
income inequality. But their impact on individuals and communities is visceral and easy to pinpoint. Consequently, many Americans, including
Trump, see globalization as a zero-sum affair,
where countries can only gain at the expense
of others, with the trade balance serving as the
scorecard. China and Mexico, with large trade
surpluses with the US, have come under specific
attack in this regard (see Fig. 1). But Germany
and Japan could also come under scrutiny.
This thinking runs against economic theory and
the empirical evidence since the 1980s. British
economist David Ricardo developed the concept
of comparative advantage over 200 years ago,
making the case that nations can gain by trading
Fig. 1: US trade deficit is concentrated in handful of countries
US trade deficit with top 15 trading partners, USD bn, 2016
350
300
250
200
150
100
50
0
Trade deficit
Source: US Census Bureau, UBS WMA, as of 13 February 2017
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POTUS 45 23 February 2017
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with each other because of their different
endowments of skills, resources, and technology. Rather than being zero-sum, trade makes
the entire economic pie bigger. That has been
the case for the global economy, as global trade
grew at the same rate as global GDP from the
early 1990s to 2011—an essential factor in raising living standards across most of the world.
But there’s a catch
While it’s true that the aggregate gains from
free trade are substantial, they’re also widely
dispersed, and the incremental benefits to US
consumers can easily go unnoticed. By contrast,
the costs to US workers are usually concentrated
within specific regions and industrial sectors
and are therefore felt more acutely—not just in
terms of lost income, but also in the breakdown
of community and family structures, as well as
the psychological cost of diminished self-esteem.
This pain is compounded by resentment over the
seeming ambivalence of government and business toward this suffering as industrial regions
experience long-term decline.
It’s against this backdrop that President Trump
has proposed taking trade actions against countries that he sees as a primary source of domestic US economic pain. The key question is not
whether he’ll do this, but whether he’ll actually
follow through with the most punitive actions.
As an experienced negotiator, he may just be
positioning himself to gain negotiating leverage.
Given that presidents have fairly broad authority to take unilateral action on trade issues and
impose tariffs on imports, this is a vital distinction. Trump’s history as a deal-maker suggests
that threats of tariffs are a negotiating tactic, but
the evidence thus far is inconclusive.
While the administration may unilaterally impose
10–15% tariffs on a number of products, especially from Mexico and China, it’s more likely that
the administration will aggressively use existing
Trade policy
Trade
policy
trade enforcement tools. These include antidumping and countervailing duties on particular categories of imports, new WTO complaints
against trade practices, renegotiating the terms
of NAFTA, labeling China a currency manipulator, a border-adjustment tax that has similar
implications as tariffs (which would likely violate
WTO rules), and some unconventional pressure
on companies to invest in the US.
Despite the best intentions to help those communities that have suffered the most from globalization, protectionism isn’t likely to provide
much direct benefit, while incurring substantial
costs for the economy as a whole. That may not
be apparent immediately, as trade barriers could
initially have a positive impact on GDP growth by
narrowing the trade deficit – a consequence of
GDP accounting, not higher economic activity.
But the net long-term effect on the economy is
likely to be negative, or at least not positive, for
three main reasons.
First, it’s a slippery slope from the US
imposing tariffs and other barriers to a
trade war. US trade partners hit with protectionist measures will almost certainly respond in
kind, and quickly. That could take the form of
targeting tariffs to specific sectors and states in
order to inflict precise economic pain for negotiating gain, or restricting the purchase of US
goods and services. Since half of all exports
globally, measured by value, cross a border at
least twice before reaching the final customer,
few countries are truly insulated from trade
disruptions.
Second, higher trade barriers could lower
US growth potential over the longer
term and increase domestic inflation. IMF
researchers, among others, have found that productivity growth at the country and sector levels is positively correlated with trade openness.
With lower competition from abroad, domestic
companies have less incentive to invest in productivity-enhancing activities, which also leads
to higher prices. That disincentive is reinforced
by an environment of geopolitical and trade
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POTUS 45 23 February 2017
uncertainty that could suppress “animal spirits.”
Consequently, a protectionist regime would only
add to the challenge of a slowing global productivity trend.
Third, even if trade barriers succeed in
bringing manufacturing back to the US,
far fewer jobs may come back than some
expect. Studies have estimated that of the five
million US manufacturing jobs lost since 2000,
only about 20% can be blamed on trade, with
the rest attributable to innovation and automation.1 Companies that return manufacturing to
the US are more likely to rely on labor-saving
capital investment or switch to less labor-intensive products. Even curtailing the flow of immigrants and restricting the employment of millions
of unauthorized workers may not help American
workers for the same reasons.
A shrinking trade deficit should
neither be the primary objective
of trade policy, nor the gauge
of its success.
These economic realities call into question the
wisdom of protectionism. More than that, they
raise a red flag about the virtues of a bilateral
and transactional approach to global engagement. A shrinking trade deficit should neither
be the primary objective of trade policy, nor the
gauge of its success. Moreover, just as the benefits of trade are widely dispersed and the costs
are concentrated, the reverse holds for trade barriers, which favor a few at the expense of many.
Yet it’s also clear that different policy approaches
are needed to address the problems of lost jobs
and stagnant income stemming from globalization. It’s the perceived and actual failures of
political leaders to address these issues that have
caused a loss of faith in the multilateral world
and given rise to strong nationalist movements.
Trade policy
Trade
policy
Trade signposts
• Trade barriers: Border tax or tariff? Presi-
dent Trump’s support for a border-adjustment tax (BAT) as part of corporate tax
reform has wavered. The BAT is economically similar to an import tariff and export
subsidy. If a BAT isn’t included in the final
tax legislation, the administration may then
look to selectively use tariffs.
• Protectionism: A little or a lot? The
administration has many non-tariff trade
barriers at its disposal. It may choose to
aggressively use many of them, such as
anti-dumping and countervailing duties,
standards requirements (e.g., labor, environmental, health, and safety), and WTO
appeals.
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POTUS 45 23 February 2017
• Renminbi: A manipulated currency? The
Department of the Treasury could label
China a currency manipulator. Such a move
would be aggressive, but done to extract
other concessions. Reports suggest that the
administration is looking for ways to allow
companies to bring anti-subsidy actions
against countries manipulating their currency without singling out China.
• NAFTA: Stay or go? President Trump wants
to renegotiate NAFTA. If US negotiators
demand concessions that Canada and
Mexico find excessive, they may be better
off leaving NAFTA rather than conceding
because tariffs under WTO “most favored
nation” status would be lower.
Investment implications
Investment implications
Weighing the upside and downside
T
he net economic effects of all three aspects
of the Trump administration’s global
engagement are difficult to isolate and, as
we’ve noted, each policy can impact other policy outcomes. Nonetheless, a protectionist and
transactional approach is likely to be negative
overall for the US economy—i.e., lower growth
and higher inflation—with the magnitude being
the main uncertainty. But this headline result
masks important details and potentially quite
different implications when looking across time
horizons, countries, industries, and asset classes.
In addition, gauging potential implications
requires assumptions about the global response
to US actions. If the latter include trade barriers, the response is likely to be immediate and
reciprocal, but it could also be asymmetric—e.g.,
China may respond to US tariffs with adversarial
measures in non-economic areas like the South
China Sea. Optimistically, a tougher negotiating
style that threatens tariffs could yield the US better trade deal terms without triggering a global
trade war. But these likely modest gains could
be offset by large intangible costs if the US is no
longer seen as welcoming to labor and capital.
Economic impact
In the absence of retaliation, US tariffs would
be a positive economic shock at home and a
negative one abroad. To illustrate this point,
UBS Investment Research estimated that a 10%
import tariff coupled with an equal export subsidy would raise US GDP growth by 0.9 percentage point and lower non-US growth by 0.4
over the subsequent 18 months.2 The US GDP
increase is partly mechanical as imports would
fall, reducing the drag of negative net exports.
But companies bringing back production and
jobs to the US would be stimulative.
In the more likely case of retaliation, the OECD
estimates that a 10% rise in trading costs among
the US, Europe, and China would lower global
GDP by 1% to 1.5%, and 2% in those regions
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POTUS 45 23 February 2017
specifically.3 The benefits of US tariffs would
be negated, as highly integrated global supply chains are disrupted. The impact of US tariffs on the US dollar should be positive, with
and without retaliation (see the box on the next
page for a discussion on how the dollar could be
impacted by US global engagement).
In the absence of retaliation, US tariffs
would be a positive economic shock at
home and a negative one abroad
The countries most vulnerable to a rise in protectionism are those that are more open to trade,
produce products that are easily substituted, and
have little ability to stimulate the domestic economy if their exports decline. Small open Asian
economies (e.g., Taiwan and South Korea) and
some in Latin America (e.g., Mexico) meet this
criteria because they are highly integrated into
global supply chains.
In the long term, GDP growth is the sum of
productivity growth and labor supply growth.
Neither stands to benefit from a transactional
approach to global engagement. Countries and
sectors that are less open to goods, capital, and
labor flows usually experience lower productivity
growth. Even if tighter border restrictions aren’t
imposed on all three, the US pivoting away from
its leadership of multilateral engagement would
likely diminish its ability to attract them voluntarily. The long-term implication is lower US
growth potential.
Market impact
Since the election, investors have been enthusiastic about the pro-growth aspects of President Trump’s agenda. The main question is how
much potential upside the markets are pricing
in. A similar focus hasn’t extended to the risks
of increasing protectionism and the resulting
hit to growth. With a few exceptions – e.g., the
Investment implications
Mexican peso and higher currency volatility –
financial markets don’t appear to be pricing in
much of this risk. Consequently, they’re vulnerable to correcting on indications of rising US protectionism that is met with retaliatory actions.
In the US, the sector winners and losers will
depend on many factors, including which
measures are used (e.g., BAT vs. tariff), other
changes in corporate tax reform, and secondorder effects regarding currency movements,
competitive dynamics, and input substitution.
The industries most exposed to imports are
apparel, computers and electronics, and textile mills and products. Service sectors, an area
where the US has a competitive advantage,
could benefit from an aggressive approach on
trade if it helps to open up protected markets in
other countries.
A changing world, shaped by the Trump Doctrine
G
lobalization, as we’ve known it, is already changing. Global trade growth has been below nominal GDP growth for five consecutive years, after growing at the same rate for the prior two
decades (see Fig. 2). There are both cyclical reasons for this (e.g., lower commodity prices reducing the dollar value of trade) and structural factors (e.g., a shift from an investment to a services-led
growth model in China). Creeping protectionism is also already a factor, as the use of non-tariff measures has been on the rise since 2009. This trend of lower trade growth is likely to continue as economic
growth becomes ever more dependent on intangible services and intellectual property than on the production of physical goods.
However, the absence of further headway on trade liberalization or slower trade growth doesn’t mean
that globalization won’t continue. Instead, it will proceed on a deal-by-deal basis, whether at the country or corporate level. Exactly how this evolves will be shaped by the policies that the Trump administration starts laying out over the next few months. In the interim, there will be much uncertainty, and
anxiety, as investors assess how this doctrine takes shape.
Fig. 2: Global trade growth has been half of global GDP
growth in the past 5 years
Percent y/y, three-month moving average (lhs) and % y/y (rhs)
% y/y
6
5
4
3
2
1
0
–1
–2
–3
–4
–5
20
15
10
5
0
–5
–10
–15
–20
–25
1992
1996
2000
2004
2008
2012
Global trade growth (lhs)
Global GDP growth (rhs)
Source: Netherlands Bureau for Economic Policy Analysis, Citi Research, UBS,
as of 13 February 2017
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POTUS 45 23 February 2017
2016
Investment implications
The Trump Doctrine’s impact
on the US dollar
T
he US dollar is a hurdle to President
Trump’s desire to reduce the trade deficit. He’s already stated that the dollar is
overvalued, thereby talking it down a bit this
year. But other aspects of his trade policy could
strengthen the dollar. The overall impact of the
Trump Doctrine depends on many factors.
Fourth, protectionism could slow capital flows
into the US, or even capital flight, which is negative for the dollar. Foreign investors finance
the US trade deficit by buying US financial
assets. They could respond to explicit trade
barriers or more restrictive immigration by
slowing these asset purchases.
First, President Trump is correct – the dollar
is overvalued. As Fig. 3 shows, the DXY dollar index, which has appreciated almost 40%
since 2011, is now about 20% above its purchasing power parity (PPP) level—the level
that ensures that a basket of goods in one
country sells for the same price (exchangerate adjusted) as the same basket of goods in
another country. On that rationale, the dollar
is almost 35% overvalued relative to the yen
and about 15% versus the euro. Over time,
the dollar should depreciate to correct this
overvaluation.
Fifth, the dollar could come under pressure
if the markets penalize the US for being the
source of global instability through the Trump
Doctrine. That could happen quickly if the US
reneges on one of its multilateral commitments
or over time if such policies chip away at the
dollar’s status as a safe-haven and the world’s
reserve currency.
Second, protectionist policies should lead to
dollar appreciation. A 20% corporate tax rate
with a border-adjustment tax (BAT) is economically similar to a 20% tariff on imports. In theory, the dollar should appreciate immediately
until it fully offsets the BAT, leaving imports
and exports unaffected. But in reality the dollar is unlikely to appreciate nearly that much,
especially in the short term. Studies show that
it takes a very long time for deviations from
PPP to correct. In addition, consumers may
substitute away from some imported products,
limiting dollar upside. All told, the increase may
be modest, below 10%.
Third, dollar appreciation will vary across currencies. It should be less against countries with
tighter supply-chain linkages with the US, such
as Canada and Mexico. Countries that retaliate to US trade barriers would also limit dollar
appreciation vis-à-vis their currencies.
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POTUS 45 23 February 2017
The net effect on the dollar is likely to be positive over the near term. But the forces for
dollar weakness gain strength as the horizon increases, especially because the dollar is
expensive. The implication is a volatile path,
one that’s sensitive to the sequencing of global
engagement policy actions.
Fig. 3: The US dollar is currently expensive relative to other
G10 currencies
Percentage overvaluation based on purchasing power parity vs. spot
exchange rate
35
30
25
20
15
10
5
0
JPY
GBP
SEK
EUR
Source: Bloomberg, UBS, as of 13 February 2017
CAD
CHF
DXY
In brief
Priorities and impact
Overview
Tax reform
Regulatory relief
Spending initiatives
Global engagement
Expect a reduction from
the 35% corporate tax
rate. Proposals are for 15%
(Trump) and 20% (Ryan), but
25% is more likely. The size
will depend on the inclusion of a border-adjustment
tax (BAT)—a tax on imports
and subsidy for exports. It’s
unlikely but would enable a
larger cut.
Relief has already occurred
through executive orders
and new appointments
in the cabinet and agencies,
with further changes likely
to come in the form of new
legislation.
President Trump has mentioned a USD 1tr infrastructure spending package over
ten years, as well as a boost
in defense spending. Actual
spending is likely to be
more modest, around USD
400bn over ten years.
A “Trump Doctrine” is
emerging, guided by the
principle “America First,”
which entails a fundamental
shift in American foreign policy. It rejects multilateralism
and evaluates all relationships
by the economic bottom line,
leading to a transactional
approach to interactions.
Other possible reforms are
accelerated depreciation of
capital expenses and reduced
interest deductibility. A tax
break on the repatriation
of foreign earnings is very
likely – it has broad support
and generates revenue.
Legislation might not happen until late 2017, and
possibly not at all, due to
complex and contentious
negotiations.
Lowering and simplifying personal income tax
rates is a goal but may be
included.
12
The focus has been on energy
and environmental-related
regulations, and an overhaul
of Dodd-Frank. Significant
changes to the latter will
require new legislation.
The repeal and replacement
of Obamacare is a priority,
and a new proposal is possible by the end of 1Q17.
Congress can overturn
recently issued regulations
under the Congressional
Review Act. It will also look to
reform the federal regulatory
process, requiring congressional votes on certain regulations from the executive
branch.
The administration appears to
be focused on public-private
partnerships and tax credits
tied to repatriation of foreign earnings to pay for the
package. Consequently, the
plan may only get Republican
support.
A new infrastructure program
could be dealt with through
the budget reconciliation process in 2017, but that could
require other spending cuts.
A more likely timeline is early
2018.
Improving the trade balance is
a primary goal. The administration has already indicated a
desire to renegotiate NAFTA.
It could use anti-dumping
and countervailing duties on
particular imports, bring complaints before the WTO, label
China a currency manipulator, and potentially impose
new tariffs.
The Trump administration is
likely to continue aggressively
enforcing immigration laws
and actively seeking to deport
illegal immigrants.
Prioritization
High
High
Low / medium
High
Expected timing
Late 2017 – 2018
Immediate and ongoing
Late 2017 – 2018
Immediate and ongoing
Probability
Medium / high
High
Low / medium
High
Economic
implications
Modest boost to GDP
growth from corporate tax
reform (<0.5 percentage
points [ppt] and not until
late 2017/early 2018). Small
but positive impact on inflation. Fed stays on pace for
two rate hikes in 2017, with
upside risk. A border-adjustment tax is unlikely, but could
be inflationary and cause USD
appreciation.
Specific areas of the economy
may get a significant boost
but the aggregate impact
on growth is likely to be
modest in the near term.
Over the longer term, reforms
could lead to faster productivity growth, which can be
disinflationary.
Positive for growth, but the
GDP impact should only
be 0.2–0.3ppt if annual
investment is USD 40bn.
Reinforces the rising inflation
trend, with a faster-thanexpected pace if the spending is closer to USD 100bn
annually.
US growth could suffer
as the negative impact from
new trade barriers, tighter
immigration, and an uneven
foreign policy erode the positive effects of the pro-growth
agenda. The effects are likely
to be uneven across countries
and sectors. They should
also be inflationary.
Investment
implications
Positive for US equities.
Foreign earnings repatriation could boost S&P
500 earnings per share by
3–4%. Reduction of corporate rate to 25% could boost
profits by 8–9%. Domestically-focused companies benefit the most.
Initial benefits are likely to
be concentrated in specific
sectors, with energy, healthcare, and financial services
most directly impacted.
Benefits of additional spending are likely to be concentrated in certain companies.
US infrastructure-related
stocks appear to be
already pricing in USD
300bn–400bn of spending
over ten years. This supports
our expectation that rates are
likely to rise gradually.
Most markets don’t
appear to be pricing in
global engagement risks.
Trade barriers should be bad
for risk assets, especially
globally focused companies.
They should also lead to USD
appreciation in the short
term, but the Trump Doctrine
risks weakening the USD over
the long term.
POTUS 45 23 February 2017
Dynamic Trump
Publication details
Publisher
UBS Financial Services Inc.
Wealth Management Research
1285 Avenue of the Americas, 20th Floor
New York, NY 10019
This report was published
on 23 February 2017.
Editors in chief
Jason Draho
Mike Ryan
Editor
Kate Hazelwood
Recent developments
Contributors
The Republican party’s slim congressional majorities have not been
enough to break the DC gridlock, and a climate of partisanship has
contributed to one of the most contentious cabinet appointee confirmation processes in US history.
Jason Draho
David Lefkowitz
Tom McLoughlin
Mike Ryan
Justin Waring
But while the protracted appointment process has frozen progress on
a number of legislative priorities, the White House boasts that it has
issued executive orders and memoranda so quickly that it is running
out of the gold-plated pens that the president uses to sign them.
Project management
John Collura
Paul Leeming
Matt Siegel
Here is a sample of orders issued since our last report:
Report design
George Stilabower
• Imposing lobbying restrictions for former administration offi-
cials, including a lifetime ban on petitioning on behalf of foreign
governments;
• Directing a Treasury Department review of financial regulatory laws
and regulations to conform to a new set of “core principles” for
financial regulation;
• Requesting a Labor Department review of the “Fiduciary Duty”
(in alphabetical order)
Desktop publishing
Cognizant Group – Basavaraj
Gudihal, Srinivas Addugula, Pavan
Mekala and Virender Negi
Photos
iStock, Getty Images
rule;
• Loosening enforcement of the Affordable Care Act by amending
health insurance enrollment and tax-filing enforcement policies;
• Creating a task force to propose new crime reduction legislation,
focusing on drug trafficking, illegal immigration, and violent crime;
and
• Asking the Justice Department to consider increased penalties for
crimes committed against law enforcement officers.
Endnotes
1 Michael J. Hicks and Srikant Devaraj, “The Myth and the Reality of
Manufacturing in America,” Ball State University Center for Business and
Economic Research, June 2015.
2
UBS Investment Research, Pierre Lafourcade and Arend Kapteyn, “Are US Tax
& Trade Policies a Zero-Sum Game?” Global Economic Comment,
13 February 2017.
3 OECD Economic Outlook, Volume 2016, Issue 2, November 2016.
13
POTUS 45 23 February 2017
Mike Ryan
Jason Draho
Leading the POTUS 45 team this year are
Mike Ryan, Chief Investment Strategist,
Wealth Management Americas, and Jason
Draho, Head of Tactial Asset Allocation, US.
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