Will Donald Trump be good or bad for investors?

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Donald and Melania Trump

Immediately following Donald Trump's election victory, stock markets across the globe fell heavily. His win was unexpected and his promise of significant change to the status quo filled investors with uncertainty and in many cases, fear. However, share prices quickly recovered and investors now seem to be quietly optimistic about plans for lower taxes and higher spending in the US. Therefore, could Trump be good for investors? Or will his policies cause share prices to fall?

Perhaps the most surprising thing about Donald Trump's election victory is that we don't know exactly what his policies will be. They could be as per his campaign promises, where he pledged to be tougher on China, more protectionist, to reduce taxes and spend heavily on infrastructure.

In such a scenario, Trump is likely to be bad for investors. That's because his apparent negative stance on the free trade agreements signed with Canada and Mexico, alongside the proposed trade agreement with the EU, could cause global GDP growth to come under pressure. Global trade could fall as tariffs and protectionism replace a move towards free trade and lower tariffs that has been a key feature of globalisation in recent decades.

Similarly, Trump's promise to reduce taxes and spend more on infrastructure could lead to uncertainty regarding the strength of the US economy. Normally, higher spending means higher taxes and vice versa. As such, Trump's higher spending and lower taxes promise could mean that US debt levels spiral over the medium term. Given that the credit crunch caused a spike in US borrowings that ultimately led to a credit downgrade, further increases in debt could sap investor confidence in the world's largest economy and lead to share price falls.

Sheep in wolf's clothing?

However, Trump may decide to change his policies before taking office. His first speech as President-elect promised to bring America together and this could signal a softening of the approach he took during the campaign. This could mean that Trump is less radical than was first anticipated, which may bring a degree of stability to global stock markets.

Furthermore, Trump's stimulus plans could work. Higher spending on infrastructure would create more jobs and could deliver higher growth for the US. This would positively impact the global economy and may send share prices higher. In addition, lower taxes and the potential for cash held outside of the US to be reinvested in the economy may improve consumer spending over the medium term and lead to a higher growth rate. And if debt is kept at sustainable levels, then a case for Trump being good for investors could easily be made.

Of course, at the present time we simply don't know what Trump will do next. Change and uncertainty is likely to be a key feature of the coming months, which makes it a good time to consider purchasing high quality stocks for the long term. Paper losses may be felt in the short run, but over the long run there continues to be high profit potential on offer.

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