A full 2 months after Trump was elected as the 45th President of the US, he addressed the press for the first time on January 11th 2017. There were a lot of hopes and expectations built around the Trump speech as key announcements were expected. However, it needs to be said that while the speech began with a bang, it did end in a whimper. Here are 12 key takeaways from the Trump speech…
12 things to carry away from the Trump speech…
- The speech was surprisingly silent on the subject of tax cuts. In his election campaign, Trump had promised sharp cuts in personal and corporate taxes to spur a consumption driven boom in the US. The speech had no mention of tax cuts, either the form or the extent. For countries like India, that was little disappointing as Indian businesses were counting on a rapid consumption led growth in the US to drive global demand recovery.
- The speech also made no mention about the $ 1 trillion infrastructure spending that Trump had promised in his election campaign. Again, markets were expecting some cues on the nature and the extent of spending as well as the time-table. The infrastructure spending was expected to trigger a capital investment cycle and have a multiplier effect on demand for capital goods worldwide. However, there was little mention of that.
- The speech surely had something for the pharma industry to worry about. To begin with, Trump promised in his speech to repeal and replace the Obamacare program, which was designed to make affordable healthcare available to millions of Americans. Scrapping Obamacare, without an alternative, will put the long term plans of many Indian pharma companies on hold.
- Trump’s speech also dwelt at length on pharma pricing. Ironically, while Hilary Clinton had made her anti-pharma stance the core of her election campaign, Trump agreed to adopt a more benign approach. Trump’s announcement to come down heavily on predatory pharma pricing is not great news. While the focus is on formulations manufacturers, the lens has also been on Indian generic pharma stocks with respect to pricing. Pharma may be under pressure.
- A tax on outsourcing was another dampener for the markets. Trump has mentioned about imposing a border tax on US companies that shift operations to other emerging economies for the sake of lower costs. This leads to loss of jobs in the US and therefore impairs the standard of living of Americans. Trump was to prevent this by imposing border tax on outsourcing.
- While the focus of a Border Tax will be on large manufacturers like Apple, IT outsourcing is also likely to come under the lens. Will US companies also have to pay border tax on IT activities outsourced to India, remains to be seen? While the rate of such a tax is not know, if it ends up being a penal rate of tax then it could surely change the economics of outsourcing.
- Trump’s speech dwelt at length on the economics of defence expenditure in the US. The speech especially came down heavily on the F-35 fighter jet program, which is manufactured by Lockheed Martin, one of the largest defence manufacturers in the world. If Trump also starts taking a re-look at the overall defence spending of the US, it could have larger implications for US defence business as well as for global outsourcers.
- The move is likely to make defence outsourcers the world over cautious. Many of them depend on large US companies to outsource some of their operations for the sake of lower costs. For example, India recently permitted 100% FDI in defence and the idea was to count on US defence companies to support with outsourcing orders. With a tighter review of US defence budgets, these giveaways may reduce substantially.
- The Mexican Peso has been among the worst performers and has lost over 22% since Trump was elected to the President’s office. Trump has already promised to build a wall along the Mexican border and deport all illegal immigrants back to Mexico. These points were reiterated in the speech. This is also likely to raise questions over the NAFTA, a free trade arrangement that the US shares with its neighbours.
- The speech again raised the issue of transparency with Trump refusing to make his income tax returns public. Previous American presidents have been transparent about their tax filings. There was also the expectation that Trump would give up control over his business empire by transferring ownership. However, he has only transferred operations to his sons but retains control. How the conflict between business and presidency gets addressed remains to be seen.
- The big takeaway for the markets was that there will not be a runaway rally in the US dollar. That reduces the prospects of a weakening of the Chinese Yuan and also a currency war among emerging markets. That is a short term positive for emerging markets. Also the deluge of capital flows from EMs into the US does not appear to be happening any time soon.
- The reaction of global markets has been fairly tepid with little sign of panic. That may be an indication that markets are willing to give Trump more time to prove his reformist credentials. However, the message seems to be clear for the next US president; market patience can wear thin quite fast. What markets really require is clarity on the action plan and a credible time-table. The sooner Trump provides it, the more enthusiastic will be the market reaction.