Too bad if you’re a US company, like an automobile manufacturer, reliant on imports from Mexico. Donald Trump just promised to impose a 25% tax on your supply chain, along with everything else imported from Mexico. And Canada. The fact Trump himself negotiated and signed a free trade agreement with Canada and Mexico, to replace the North American Free Trade Agreement in 2020, is apparently irrelevant. And he’s announced a 10% “just for starters” tariff on Chinese imports.
In response — even though Trump won’t be inaugurated for another two months — sharemarkets fell, but the US dollar rose (sending the Australian dollar falling further). The greenback had already risen against major currencies after Trump’s victory on November 5, and will likely appreciate every time the president-elect announces new tariffs — until markets price in the full effect of the tariff wall Trump has promised to erect around America.
Each appreciation of the dollar will further erode the competitiveness of US exports and improve the competitiveness of imports against American products — undermining the very point of Trump’s taxes. Given how little grasp he appears to have about who bears the costs of tariffs, Trump will possibly react by simply increasing tariffs further.
Along with his promise to deport every undocumented worker in the country, inflicting serious labour shortages on industries like construction and agriculture that depend on illegal immigrants for much of their workforce, and his threats to curtail the independence of the Federal Reserve, the tariffs will make for extremely uncertain times for US business — and investors in the US.
Prominent among such investors is Australia’s Future Fund. Page 61 of the Fund’s 2023-24 annual report reveals that 43% of its $229.7 billion in assets are located in America via a heavy US weighting of listed and private equity, property, infrastructure and credit. That compares to just 27% of its assets invested in Australia, and is up from 39% in 2022-23.
That’s a substantial change from before the pandemic: in 2019-20, Australia held the biggest share of the Future Fund’s assets — 39% against 31% for the US. The shift has also been lucrative for the Fund, which has benefitted from a stronger performance of Wall Street. US stocks have had a huge run since the start of 2023 with a 54% gain for the S&P 500, much of that coming from stocks like Nvidia, Apple, Microsoft, Meta, Tesla, Alphabet and Amazon. That index is up 26% this year to date against a 9.8% rise for the Australian ASX 200.
But what about from here?
It is hard to see how Trump’s tariffs, deportations and intervention in monetary policy will do anything else than damage US investor and consumer confidence, help slow the fall in inflationary pressures both in America and globally, reduce US exports and eventually undermine stock markets. Trump’s first presidency doesn’t appear to be a reliable guide: Wall Street rose by more than 40% during his first stint in the White House, but much of that was due to a huge pandemic surge from March 2020 that had little to do with Trump.
What measures and hedging is the Fund putting in place to curb the risk posed by the next Trump presidency? An update on how it views the risks of its heavy investment in the US economy would be worthwhile — especially given the government is pressuring the fund to invest more in its favoured sectors here in Australia. It would be good to know if any shifts in weightings are because of risk management, rather than being responsive to Jim Chalmers’ interference.
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