Our views

'Trisky business'


Azhar Hussain, Head of Global High Yield

First published by Citywire Wealth Manager on 3 August 2016

As a property magnate, Donald Trump should be an expert on debt.

However, all four companies which he owned that went bankrupt were restructured following an inability to meet their corporate debt obligations.

The most recent, in 2009, saw a firm chaired by Trump, in which he was also the largest single shareholder, miss a $53 million bond interest payment in order to remain liquid.

In an environment where the US Treasury has had to lift the debt ceiling several times in order to meet short term liquidity requirements, the prospect of a government forgoing an interest payment as an alternative to issuing more debt would be disastrous for the valuations and ratings on all US bonds, public and private. With Trump as a president, this is a serious and frightening possibility.

It’s particularly hard to ignore comments that he might tackle US debt problems by not paying it all back, and investors are likely to be less than sanguine in their outlook for Treasury bills should the polls begin to swing in his favour.

But the Trump risks or ‘Trisks’ associated with Donald Trump’s position as the Republican candidate for the US presidency stretch far further than his past performance.

The prospect of his election means that the world economy and bond markets face a serious period of uncertainty. His nonsensical and often contradictory political and economic policies mean his election could well lead to serious gyrations in risk markets.

Underpinning the concerns of heightened volatility in markets is his contradictory stance on fiscal policy. Talk about achieving balanced budgets despite plans to increase spending and cut taxes seems to imply a wildly optimistic, and somewhat unrealistic, forecast for US growth.

Meanwhile, his immigration policies, popular with a large proportion of his core vote, involving the deportation of up to 11 million undocumented workers, are not only unworkable, but  if carried out would impact growth substantially.

His chatter about replacing Janet Yellen as chair of the Federal Reserve and introducing an audit by Congress would imperil independent monetary policy and lead to a fall in confidence in the world’s largest economy at a time when it is crucial.

Further afield, his stance on trade would see increased tariffs on all US manufacturing carried out abroad, from Ford’s car plants in Mexico to iPhones made in China, impacting profits and leading to a fall in global equity markets.

Given his charge to become the Republican Party’s candidate, and the binary nature of US elections, the economic cocktail of ‘Trisks’ he could unleash are far more than hot air. Investors should take note.

The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.