Hedge Clippings | 15 November 2024

Last week's Hedge Clippings noted that Donald Trump's election victory would lead to some predictably unpredictable outcomes. Earlier this week we met with Richard Grace, ex CBA economist, now principal of PinPoint Macro Analytics, who has kindly agreed to provide some economic muscle and rigour to our weekly view of the world. Richard's contribution is included below as a Fund Monitor's Insights Article, part of which is summarised below.

We mentioned to Richard that Newton's Third Law tells us that for every action, there is an equal and opposite reaction--a concept that generally provides a sense of predictability. But Richard pointed out that economics and politics doesn't work the way of physics and that the effects of Trump's presidency is likely to be anything but predictable:  Each of his actions is bound to provoke a reaction, but the direction and magnitude of that reaction remains anyone's guess.

Since Donald Trump was re-elected on November 5th, the Australian dollar (AUD) has slipped about 3% against the U.S. dollar, now hovering around 0.6450. For those who remember Trump's 2016-2020 term, this drop might feel like déjà vu. His announced tariffs on Chinese and European goods back then strengthened the USD and put downward pressure on the AUD, and history seems to be repeating itself.

Trump's proposed economic policies this time around are designed to boost the U.S. economy, but not without shaking up global trade relationships. He's planning to significantly increase tariffs on Chinese imports to 60% and on all U.S. imports from around 3% to 20%. If Congress allows these measures, the impact on global growth could be profound, especially as China struggles with a sluggish property market. For Australia, the road ahead may be bumpy, with the AUD facing further downside into 2025.

The graph below illustrates the effect Trump's tariffs had on a handful of currencies during his last term in office -

Meanwhile, over in Washington, Trump has assembled a headline-grabbing cabinet. His appointment of Robert F. Kennedy Jr. to head the Department of Health and Human Services is contentious, given Kennedy's scepticism towards vaccines. The potential ramifications for U.S. health policy could create market uncertainty, especially in sectors like pharmaceuticals and healthcare.

Adding another layer of unpredictability, Trump has put Elon Musk at the helm of a newly formed Department of Government Efficiency--tasked with slashing bureaucracy. Musk's call for "high-IQ revolutionaries" willing to work 80+ hour weeks for zero pay might seem like a joke, but it underscores the aggressive belt-tightening Trump is pursuing. Investors will be watching for signs that this approach could create a more efficient U.S. administration, but for now, it seems more noise than concrete benefits.

In yet another controversial move, Trump appointed Matt Gaetz as the new attorney general. Gaetz, who has faced his share of controversies, including a past Justice Department sex trafficking investigation, now leads the very institution that once scrutinised him. This, much like Trump's broader cabinet reshuffle, introduces reactions that are difficult to foresee, adding to the overall unpredictability of the administration.
With the AUD dropping and Trump's cabinet reshuffle making waves, we're bracing for heightened market volatility. While the RBA has kept a steady hand, the prospect of rate cuts looms--and with domestic services inflation still at 4.6%, a stronger USD will not make their job any easier. For investors, this means reassessing exposure to U.S. assets, particularly if tariffs start to bite global trade.

As always, in uncertain times, there are opportunities. Trump's renewed focus on U.S. industry may boost certain sectors--infrastructure, for example--and that could provide selective investment opportunities. But for those watching from Australia, the emphasis should be on managing FX risk and monitoring how the dust settles, especially regarding China and resource exports.

News & Insights

New Funds on FundMonitors.com

Macro Research - AUD Outlook | PinPoint Macro Analytics

News & Views: Tariffs - the impact on infrastructure | 4D Infrastructure

Megatrends for 2025 and beyond... | Magellan Asset Management

October 2024 Performance News

Airlie Australian Share Fund

Bennelong Concentrated Australian Equities Fund

DS Capital Growth Fund

Quay Global Real Estate Fund (Unhedged)

Glenmore Australian Equities Fund

Bennelong Emerging Companies Fund

Altor AltFi Income Fund

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