Let’s be charitable and blame the referendum. Most investors – in the UK, at least – appear so fixated by the gyrations of opinion polls they regard the prospect of Donald Trump actually becoming the next president of the US as laughable. The hair, the outrageous remarks on women, Muslims and foreigners. Populist ravings, wacky policies. Surely a landslide for Hilary Clinton?
But let’s pause for a moment’s reflection. Trump has been dismissed as an entertaining no-hoper throughout, a distraction until the Republican Party came to its senses. He stands now on the brink of endorsement as their presidential candidate. At the very least, this demands investors do more than shrug or laugh.
When I studied politics at school (rather longer ago than I care to remember) British and American politics were markedly different. The Labour party was socialist, believing in state ownership of the “commanding heights” of the economy, trade union-financed and representative of “the working class”. The Conservatives were capitalist, supported a smaller state, a market-driven economy, and spoke for the upper and middle classes.
In the US, by contrast, Democrats and Republicans were both firmly for capitalism, enterprise and the American Dream. “The business of America is business” – policy differences over more or less liberal attitudes were highly nuanced in comparison with British political divides.
Fast forward to today and a remarkable transformation has occurred. Tony Blair’s New Labour and his three election victories are but one example of the fact Britain’s two main parties now converge in their battle for the middle ground.
George Osborne unashamedly steals policies from the Labour manifesto. Voters soundly rejected Ed Miliband’s turn to the left, hence widespread incredulity at Jeremy Corbyn’s leadership. The contest now is over whom best manages the market economy for the benefit of those much-cited “hard-working families”, not between socialist and capitalist models.
But while Labour and the Conservatives have converged over the last 40 years, Democrats and Republicans appear to have diverged. Business is highly critical of Democrat interference in the market economy. Clinton’s opponent, Bernie Sanders, sounds near-socialist at times, while both appear quite happy with growing government influence.
Republicans, meanwhile, have drifted to the right, nudged by characters such as Newt Gingrich and Sarah Palin, demonising Democrat healthcare reforms. The result? Swathes of middle America do not feel either party really represents their common interests any more.
Add in the well-publicised stagnation in US middle and lower incomes over 20 years and there is ample scope for an outsider to appeal to disenfranchised voters with their version of capitalist Republicanism. Step forward Donald Trump.
And there is profound personal mistrust of Hilary Clinton. Tarnished by one mistake too many, incapable of presenting neither fresh novelty appeal nor a return to her husband’s “golden age” of growth and prosperity, she is no shoe-in.
At the very least, there must be a reasonable chance that, at some stage before 8 November, markets have to address even the possibility of President Trump. To date, they do not appear to have done so.
And what might that mean? Accepting that much campaign rhetoric will be ditched before being sworn in or prove difficult to steer through Congress, this cannot be good for world trade. Renegotiation of trade deals, accusing China (and possibly Germany) of being a currency manipulator and facing protectionist sanctions is not appealing to one brought up on the mantra of globalisation and free trade.
Equally, though, it is unclear that a country the size of China can maintain a mercantilist model as smaller nations have previously. It must accelerate closures of excess capacity in the likes of coal, steel and cement, and spur its growth of a consumer and services-driven economy. Sanctions might speed up the process.
Reductions in corporate and personal tax rates plus deficit-financed infrastructure investment do not sound good for US government debt levels, even if the trade deficit shrank alongside world trade.
Governmental oversight of the Federal Reserve might be a policy too far for investors, though perversely the infrastructure spending would probably overheat a US economy close to full employment. So the Fed might be raising rates alongside the dollar rising just when you might think its appeal was waning.
A one-off low tax amnesty on US companies repatriating cash to the US might fuel a merger and acquisition feeding frenzy on Wall Street.
And then there is scaling back US support for Nato, less interest in the Middle East but more defence spending and greater pushback on Chinese naval ambitions. Less global policeman? Or different global policeman?
In honesty, we do not know the answers to what a Trump presidency might mean. And quite probably neither does Trump himself. Reality is usually less dramatic than feared anticipation.
But it is worth thinking about – and seeing if the markets do, too. Now, where’s that latest Brexit opinion poll…
Richard Buxton is head of UK equities and manager of the Old Mutual UK Alpha fund