2024 US Presidential candidate Donald Trump. — Bloomberg
WITH the US presidential election looming just four months away, global markets are on edge, anticipating potential outcomes.
We have penned five scenarios that might unfold if Trump is re-elected as the 47th US president, covering geopolitics, de-dollarisation, rates, and implications for global and Asean economies.
It is essential to note that these are potential scenarios; the actual outcomes could differ, offering opportunities for change and adaptation.
Scenario 1: China tensions and negative spillover to Asean
Central to Trump’s approach is a robust stance on US-China relations, marked by escalating tariffs that have significant implications for global investors. Historical data indicates that tariffs implemented during Trump’s tenure shaved off 0.1% of global growth in 2018, escalating to 1.4% by 2020.
His latest proposal includes a sweeping 10% import tariff, coupled with intensified rates targeting China specifically. This move is expected to drive US headline inflation to 4% by 2025, up from the current 3%.
Such measures could disrupt global trade flows and industrial progress over the long term.
However, a Democrat victory might temper tensions, offering hope for the future of US-China relations.
Trump’s proposed tariff hikes on Chinese imports, particularly in sectors like new-energy vehicles and semiconductors, underscore a persistent strain in US-China relations. This geopolitical friction is poised to sway investor sentiment, favouring developed market equities at the expense of emerging markets.
Scenario 2: Rate cuts in deference to political pressures
If Trump wins, the US’ real rates could sharply decline as he influences the Federal Reserve for substantial rate cuts, possibly to zero or negative levels as seen in 2019. He cites competitive disadvantages and favourable inflation conditions.
The prognosis of US inflation is unclear, given the conflicting factors. At this point, the path of least resistance is for US inflation to head lower into the new year, albeit the Trump-induced tariffs may eventually lead prices higher in the medium term.
Market expectations are strong for Federal Funds Rate cuts in 2024 and 2025, with implications including a rally in US-centric equities, potentially 15% to 20% gains in 2025, and a bull-steepening bias in the US Treasury’s two to 10-year spread.
Global central banks, particularly the European Central Bank, will likely align with Federal Open Market Committee (FOMC) cuts, while Asean-centric rates face downward pressure.
The US Dollar Index is anticipated to soften below 100 by the first half of 2025, influenced by reduced carry advantages and yield-chasing behaviour favouring higher-yield assets.
Scenario 3: Stronger global drive to de-dollarise
In the context of a potential Trump presidency, his proposed tariffs to curb global economic growth could significantly hasten the global trend towards de-dollarisation.
This shift might expedite the emergence of a new trade currency by 2025, with BRICS nations (Brazil, Russia, India and China) actively exploring the creation of a reserve currency backed by their own currencies.
This potential shift towards a new trade currency could open up new opportunities for growth and development, particularly in Asia and Asean.
We are seeing a notable uptick in the use of the Chinese yuan for trade transactions and payments, potentially supported by increased adoption of local currency transaction agreements to reduce reliance on the US dollar.
Asean’s efforts in this regard, particularly under Malaysia’s forthcoming chairmanship in 2025, will be pivotal in shaping future financial dynamics and challenging the US dollar’s historical dominance in global finance.
Scenario 4: Increased geopolitically-driven sentiments
Increased geopolitical noise appears to be driven more by geopolitical factors rather than purely economic ones, focusing on two critical issues:
> The US potentially demanding payment from Taiwan for military protection.
> The risk of halting military aid to Ukraine.
Both could heighten global uncertainties and dampen investor risk appetite in a Trump presidency.
There are already some indications of early proxy for weaker risk appetite; Trump’s rhetoric to seek Taiwan’s payment for military protection has already sent the Taiwan Weighted Stock Exchange index down by 1.4% on intra-day trading on July 17, 2024.
Beyond the US-China, China-Taiwan and Ukraine-Russia tensions, there are other potential hotspots for geopolitical tensions in 2025, specifically North Korea-South Korea and the Middle East.
Scenario 5: Division of world order
Trump’s foreign policy rhetoric is stirring concerns about strained US alliances and potential economic isolationism, prompting trading partners to seek alternatives to traditional US economic ties.
Establishing trade and economic zones like the Regional Comprehensive Economic Part-nership, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, the European Union, and North Atlantic Treaty Organisation (Nato) reflects global efforts toward bifurcation into distinct orders amid geopolitical tensions and the pursuit of economic resilience.
Trump’s emphasis on economic isolationism and scepticism towards alliances such as Nato risks widening political divisions with US allies and could drive the formation of separate trade blocs globally.
Overall, Trump’s key trade ideas for a win are to:
> Long developed market-equities, especially US-centric
> Short on US dollar index
> Buy US Treasury on dips.
Expect higher market volatility over the next four months, with the US FOMC likely to refrain from cutting rates in the third quarter of this year on the back of tariff-induced inflation risk.
Conclusion: As anticipation builds for November’s US presidential election, the possibility of a Trump win looms large, with global concerns on the horizon.
However, these concerns may be exaggerated, given potential biases from ongoing legal battles affecting voter sentiment. For now, trading strategies remain discernible despite uncertainty, drawing on historical insights.
Barnabas Gan is the acting group chief economist at RHB Research Sdn Bhd. The views expressed here are the writer’s own.
