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Will Europe Feel the Force of ‘Trumponomics‘?

Stefan Hofrichter | 16/12/2016
Will Europe Feel the Force of ‘Trumponomics‘?

Summary

Although much is unknown about the new US president’s economic policy, our chief economist says the central theme is a shift from monetary easing (via Fed stimulus) to fiscal easing (via tax cuts and spending), which could have a major impact on Europe.

Key takeaways

  • Trump is expected to shift economic policy toward fiscal easing by cutting taxes, deregulating banks and increasing trade barriers and immigration hurdles
  • His policies should prompt the Fed to hike rates more than the markets currently anticipate
  • Equities may benefit from Trump in the near term, not least because European stocks are already slightly cheap

3 ways Trump’s economic policy could affect Europe

When Donald Trump assumes office, he is expected to focus US economic policy on fiscal easing, primarily by cutting taxes for corporations and the wealthy, deregulating banks and other industries, and increasing trade barriers and immigration hurdles. Given that the US has the world’s largest economy, his “Trumponomics” will likely have a range of significant effects on Europe.

Here are three of the most pronounced:

1. Direct economic influence
Fiscal easing is likely to have a slightly positive near-term impact on global growth and, consequently, on European growth. Over the longer term, however, the United States’ negative view of globalization and immigration should dampen trend growth.

2. Monetary policy spillover
In response to Trump’s focus on fiscal easing – and the already observed improvement in cyclical data – we expect the US Federal Reserve to hike rates by more than the markets currently anticipate. The combination of easier fiscal policy and tighter monetary policy should result in a stronger US dollar versus the euro. The euro area will therefore get additional growth stimulus, and the ECB could potentially cease its quantitative easing policy sooner than expected.

3. Political effects
Trump’s surprising victory could provide a tailwind for populist, anti-European and anti-establishment parties and movements in Italy, France and Germany. Consequently, political uncertainty is likely to increase. Europe’s economic landscape could also shift toward policies that are unfriendly toward the free movement of labour, services and capital, which would hurt growth in the long term.

Market implications of Trump’s presidency

The euro is likely to weaken in the near term, but because current valuations are already quite low, we view USD/euro parity as an extreme scenario. As the ECB is also set to become less expansionary, at least marginally, the euro may very well be in a stronger position in a year’s time. The euro bond markets are likely to see their prices move lower and yields higher as a consequence of several factors, including reflationary policies in the US; slightly less accommodative monetary policy during 2017 in the US and, in all likelihood, the euro area as well; and bond valuations that are still expensive.

Equities may benefit from Trump’s presidency in the near term, not least because European stocks are already slightly cheap. However, the expected political uncertainty, the potential change in ECB policy and the clouds hovering over the long-term US growth outlook are likely to dampen the upside in the medium term. As such, we expect today’s rather lowgrowth environment to linger.

Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. Equities have tended to be volatile, and unlike bonds do not offer a fixed rate of return. Emerging markets may be more volatile, less liquid, less transparent and subject to less oversight, and values may fluctuate with currency exchange rates. Bond prices will normally decline as interest rates rise. Below investment grade convertible and fixed-income securities involve a greater risk to principal than investment grade securities. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice. References to specific securities are not intended to be, and should not be interpreted as an offer, solicitation or recommendation to purchase or sell any financial instrument, an indication that the purchase of such securities was or will be profitable, or representative of the composition or performance of any AllianzGI product. The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted. This material has not been reviewed by any regulatory authorities. In mainland China, it is used only as supporting material to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations. This material is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424, Member of Japan Investment Advisers Association]; Allianz Global Investors Korea Ltd., licensed by the Korea Financial Services Commission; and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan. GrassrootsSM Research is a division of AllianzGI Research. Data used to generate GrassrootsSM Research recommendations is received from reporters and field force investigators who work as independent contractors for broker-dealers. Those broker dealers supply research to AllianzGI and certain of its affiliates that is paid for by commissions generated by orders executed on behalf of AllianzGI’s clients. Source of all data (unless otherwise stated): Allianz Global Investors as at November 2016. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Allianz Global Investors is a trademark, registered in various countries throughout the world, including the United States. © 2016 Allianz Global Investors.

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Stefan Hofrichter

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Head of Global Economics & Strategy
Stefan Hofrichter is Head of Global Economics & Strategy at Allianz Global Investors. His research covers global economics as well as global and European asset allocation. Stefan joined the firm in 1996 as an equity portfolio manager and assumed his current role as an economist and strategist in 1998. Between 2004 and 2010, he also had responsibility for various retail and institutional mandates, including global and European traditional balanced funds, global multi-asset absolute return and multi-manager alpha-porting funds. Stefan became a member of the firm’s Global Policy Council in 2004. Stefan holds a degree in Economics from the University of Konstanz (1995) and in Business Administration from the University of Applied Sciences of the Deutsche Bundesbank, Hachenburg (1991). Stefan became a CFA Charterholder in 2000.

3 Powerful Forces Transforming the US Economy

Steven Malin | 17/12/2016
US Presidential Election

Summary

Some of the top factors limiting US growth also hold the key to its future: Fed policy has lost its effectiveness, populism has transformed politics and technology has radically reshaped economic activity. Policymakers and businesses alike must take notice or risk missing the wave.

Key takeaways
  • Several Fed officials now feel that a less accommodative policy stance and a looser regulatory environment would help stimulate the US economy.
  • Structural changes in the economy weaken the Fed’s ability to hit policy targets that often turn out to be wrong.
  • Ultra-low rates have distorted markets, altered the timing of consumer and business spending, resulted in too much cash on balance sheets and curtailed the capital spending they were designed to stimulate.
  • Populist movements will continue attacking monetary and fiscal policies, regulations, trade relations, immigration and environmental policies, and other aspects of government.
  • New technologies are radically reshaping every facet of economic activity, transforming industries and sectors more disruptively than any previous industrial revolution.
  • Not heeding the implications of the modern industrial revolution could lead to major policy errors and unprecedented threats to businesses.

Central bank policies now impede economic growth

Throughout most of the post-crisis period, the US Federal Reserve argued that the United States' weak economic growth, productivity and capital spending were caused mainly by insufficient aggregate demand. In response, the Fed implemented aggressive monetary accommodation to stimulate spending – and, for a while, it succeeded. However, GDP growth soon decelerated and business investment stayed subdued, which indicated that the economic theory the Fed relied upon had proved to be faulty.


Economic growth stays range-bound

Real GDP growth has been modest, but sustainable

Economic growth stays range-bound

Source: Federal Reserve Bank of St. Louis; Allianz Global Investors as at 29/11/2016.



Consequently, several Fed officials in 2016 wrote extensively about how structural changes in the US economy had been interacting with ultra-low interest rates and tougher regulations on banks to make interest rate targeting difficult, reduce the target level of policy rates and restrain real economic growth. Among their key findings:

  • Precautionary savings rose, causing real consumption to not keep pace with real disposable income.
  • Persistently low interest rates encouraged households to postpone consumption and build up precautionary savings.
  • Regulations raised hurdle rates on prospective business investments.
  • The mix of regulatory and economic policies encouraged capital spending outside the United States rather than within it.
  • Low interest rates encouraged corporate leverage – not to finance productive investment, but to finance share buybacks and dividend distributions.
  • Federal Reserve ownership of Treasury securities removed collateral from the repo market used to finance day-to-day operations of businesses.
  • Low interest rates strained pension funding.
  • Mortgage financing became more difficult.
  • Banks chose to restrict some forms of lending in order to protect their equity from potential loan losses.


New fiscal priorities must heed the modern industrial revolution

The Fed's policies and unforeseen structural changes have not been the only factors causing sluggish US economic growth. Growing populist movements are set to at least partially shape a new wave of fiscal intervention into economies – and monetary policy must account for these new influences in the years ahead. These movements reflect a combination of globalization, technological changes, political stalemates and geopolitical crises that have resulted in lower inflation-adjusted incomes and widening of income and wealth disparities.

Moreover, the inexorable development, marketing and implementation of a range of new technologies has already reshaped how businesses are organized – and arguably altered every aspect of economic activity. This chain reaction of technological progression will continue to generate enormous upheaval and opportunity. Not only have modern technologies become disruptive, but they have reduced the need for material inputs, enabled production at a zero marginal cost, made the entirety of human knowledge accessible via the cloud, and made knowledge available to anyone in the world at virtually no cost. These are new technologies that now "crowd-in" knowledge and understanding instead of crowding it out.

Clearly, the pace of adoption of new technologies has never before been so pervasive and rapid. As a result, all households, businesses and governments must adapt to and change with this new, modern industrial revolution or else risk their economic and financial well-being, now and in the future. This has significant implications for the Fed and other central banks: Failing to master the implications of this industrial revolution will not only cause them to miss their policy targets, but push them toward setting the wrong targets.

For more on this topic, read Steve Malin's white paper: "Under the Macroscope: Policy, Politics, and Technologies Scuffle in a New Era".



Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.

The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.

This material has not been reviewed by any regulatory authorities. In mainland China, it is used only as supporting material to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations.

This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424, Member of Japan Investment Advisers Association]; Allianz Global Investors Korea Ltd., licensed by the Korea Financial Services Commission; and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan.

© 2016 Allianz Global Investors. All rights reserved.
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Steven Malin

Investment Strategist, US Capital Markets Research & Strategy
Steven Malin is an investment strategist and a director with Allianz Global Investors, which he joined in 2013. As a member of the US Capital Markets Research & Strategy team, he is responsible for making weekly US and global asset-allocation recommendations. Steven’s responsibilities also include analyzing global economic, financial, political and regulatory developments; and briefing institutional, retail and retirement clients. Before joining the firm, he was the director of research at Wealthstream Advisors, a private wealth management firm; and an advisor to Aronson Johnson & Ortiz, a quant-based institutional equity manager. Earlier, Steven was a senior portfolio manager at AllianceBernstein, serving institutional, sub-advisory, Taft-Hartley and private clients throughout North America. He also worked at the Federal Reserve Bank of New York for more than 16 years, and during this time he was an officer who held several senior position. Before that, he was the senior economist, founder and director of the regional economics center at The Conference Board. Steven has a B.A. in economics from Queens College and a Ph.D. in economics from the Graduate Center of the City University of New York.
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