In the wake of Trump’s controversial win, it is hard to enter any room without the US elections creeping into conversation. In the absence of a crystal ball for a financial forecast, Canstar has pooled economists’ predictions to see what a Trump presidency could mean for the finances of everyday New Zealanders.
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Donald Trump win “Cons” in more detail
Stock market volatility
Even in the lead up to the elections, the markets have shown volatility, particularly as the polls showed a Trump win as increasingly likely. Clinton was seen as safer bet for investors but Trump, predictably unpredictable, spooked the markets. Prior to the election result, the yen strengthened and gold rose, but stock markets took a dive as investors were rattled by the possibility of a Trump triumph. The yen was seen as a “safe haven” investment, which accounts for the increase. By late afternoon on Thursday, New Zealand time, the S&P NZX 50 Index dropped by 2.4% to 6,732.41.
The reason for this volatility, is that share markets fear uncertainty, in this case what will happen in the aftermath of Donald Trump becoming president. In a media conference following the Reserve Bank’s OCR cut to 1.75%, Governor Graeme Wheeler said the election result has, “clearly surprised the market”.
The split between emerging and developed markets after the Trump win is hardening in Asia. https://t.co/OOV0y527sp pic.twitter.com/ECYOuG3mT3
— Emma OBrien (@ek_obrien) November 11, 2016
Share markets collapsed Wednesday and the dollar tumbled against the yen and the euro as Donald Trump won the US presidency #Elections2016 pic.twitter.com/YVnspO1BHd
— AFP news agency (@AFP) November 9, 2016
ASB chief economist Nick Tuffley says it is possible that the unstable financial risk sentiment, and the possibility of a hostile approach to trade following Trump’s win, leaves commodity-vulnerable currencies such as the New Zealand dollar vulnerable to decreases against the US dollar.
Impact of market on KiwiSaver investments
As a flow-on effect from share-market volatility, it is quite possible growth KiwiSaver accounts – which involve shares and property – will experience a decrease, even if only in the short-term.
ASB explains how market volatility may impact your KiwiSaver:
“Initially, global markets reacted negatively to this surprise [Donald Trump’s win] however there may continue to be some volatility over the short term.
“These ups and downs in the value of the investments will flow through to your KiwiSaver, but don’t panic. Fluctuations in your account balance are to be expected.”
However, provided this is only a short-term fluctuation for your investments, this could also be seen as a pro given KiwiSaver is designed as a long-term investment.
Don't panic – your KiwiSaver will outlive @realDonaldTrump's presidency https://t.co/8wxcAosdn2 (Via @TonyJField)
— Newshub (@NewshubNZ) November 9, 2016
Potential increase in borrowing costs
Immediately following Trump’s win, there has already been an increase in US medium to long-term interest rates. As BNZ chief economist Tony Alexander points out, this move has been in anticipation of larger budget deficits and higher inflation.
“…this adds to the already growing pressure for fixed home lending rates to rise here. Big movements up are unlikely, but perhaps this time post-GFC we can have very high confidence that we have finally gone past the low point for the fixed rate cycle,” Mr Alexander says.
The New Zealand Institute of Economic Research (NZIER) predicted New Zealand’s economy would be in for rocky times if Trump was elected, increasing the likelihood of mortgage rate increases.
Prior to the election announcement, NZIER chief executive John Ballingal predicted a Trump win would mean increased borrowing costs for New Zealand firms and mortgage holders, with credit conditions tightening in the face of uncertainty.
Possible decrease in trade opportunities for NZ
It is important to remember that Donald Trump is not actually sworn in as president until 20 January, so it will be at least a few months before any new polices are enacted – and for any impact to filter through. However, Mr Trump has already made clear his objections to the Trans Pacific Partnership Agreement (TPPA). This means if the TPPA is quashed – as is now expected – this could have a significant impact on New Zealand’s trade and export market.
The US currently accounts for 12% of New Zealand’s exports and is our fourth biggest export market after Australia China and the EU bloc, ASB’s Mr Tuffley says in his latest economic update.
However, the trouble is there is uncertainty around what extent any trade protections will undo any impact of a US financial boost here in New Zealand.
“Trump’s proposal for punitive tariffs on China, and the likelihood, of retaliation, would slow growth in the world’s two largest economies,” Mr Tuffley says.
“That in turn would flow through to broader global demand. NZ has a large direct exposure to China, and a large indirect one through Australia and broader Asia. China would also attempt to switch its exports to alternative markets, constraining global inflation.”
However, Mr Tuffley says ASB does not expect the impact of punitive tariffs on China to be too substantial.
Donald Trump “Pros in more detail”
Potential for export opportunities in New Zealand
On the other side of the coin, income tax cuts in the US and stronger government spending would spur economic growth which implies NZ would experience stronger export growth to the US, ASB’s Mr Tuffley says.
BNZ’s Mr Alexander says, overall, the economic ramifications for New Zealand do not appear to be too deep. In fact, he says potential for eventually faster growth in the US economy from financial stimulus could provide export opportunities, “at the extreme margin”.
Fluctuations in KiwiSaver expected to be short-term
Fluctuations in KiwiSaver growth accounts are expected to be short-term, with global markets appearing to bounce back, ASB says in its blog.
As KiwiSaver is a long-term investment, it’s important to remember that the markets will pick up again, as they are cyclical.
“Prior to the recent market volatility, world markets have experienced growth in recent years. It is impossible to predict when these cycles will start and finish. Investors who try to avoid volatile periods in share markets risk missing out on gains that can follow,” ASB says.
In addition, when the market is low, you’re actually buying units at a cheaper price. Every time you make a contribution to your KiwiSaver account, you’re actually buying new units.
Any units that you buy now will help you to grow your KiwiSaver account over time as the market improves.
Volatility in the New Zealand dollar appears to be short-lived
While the New Zealand dollar dropped initially, in response to the US elections, it has not actually shown much change against the US dollar.
BNZ’s Mr Alexander explains any weakness in the New Zealand dollar appears to be short-lived.
“My personal view remains that the Kiwi dollar has support from a wide range of factors, not the least being the strong state of the economy plus the new element of recovering dairy prices.
“Any weaknesses attributable to the uncertainty surrounding the President-elect may have already been and gone.”
The Reserve Bank of New Zealand (RBNZ) has also signalled any further reductions to New Zealand’s cash rate are slim, with inflation expected to pick up in the December quarter.
Governor Graeme Wheeler says RBNZ considered changing its statement and the rate cut after the election announcement but decided it wasn’t necessary.
However, Mr Wheeler says the bank will keep an open mind about the need about any policy changes required in the aftermath of the US elections, and with any Brexit developments.
Featured image: Andykatz | iStock
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