These are emotional times. Since the election of president Rodrigo Duterte in the Philippines, the UK's decision to exit the EU, the emergence of Marine Le Pen in France, and the shock victory of Donald Trump in the US presidential elections, the airwaves have been replete with messages about the global wave of populism.
A simple Google search of 'geopolitical trends' reveals myriad commentaries about the end of neoliberalism, the changing social contract between governments and their constituencies, and the retreat of globalisation. While geopolitical forecasts that focus on macro issues will certainly affect all investors, the body politic needs a framework for understanding the specific ways in which regional political and economic trajectories will affect their US operations.
Despite the relentless coverage of the Trump White House, many foreign and domestic investors in the US remain confused about the national and local investment climate. Without the tools to separate the reality from the rhetoric, the noise of buzzwords such as 'economic nationalism' and 'alt-right' will drive investors into fear-induced figurative paralysis.
A three-point framework to help investors draw conclusions that are based on facts will enable smarter and clearer decisions. For example, a reactive inbound investor who fails to explore the impact of political risks on foreign companies in developed markets might forego a potential investment out of fear that its assets will be expropriated. The reality is that political risks in developed markets are more likely to manifest in trade barriers or increased taxes that obstruct operations but do not decimate them.
While it is impossible to identify and measure every factor that might impact a project’s ability to succeed, the framework provides investors with an opportunity to customise an assessment that identifies the likelihood and impact of specific outcomes that are byproducts of a Trump presidency.
The framework asks three questions to help direct investors measure the effects of Mr Trump’s policies:
1) What are the key aspects of my business model that will be impacted by the investment climate in the US?
2) What is Mr Trump’s stated or likely position on these issues?
3) How do constitutional powers and structural constraints on the presidency impact his ability to implement them?
Calibrating the lens
What aspects of the investment climate in the US will have the most impact on my business? A review of an inbound investor’s method of entry, industry and business model reveals the most relevant aspects of an investment climate. Whereas the liquidity of portfolio investments often turns asset managers’ attention to short-term contagion effects, a foreign direct investor will need to understand the impact of policies in the medium and long terms.
With a focus on FDI, this article uses two fictional projects to highlight the ways in which investors can identify the most relevant variables and determine how a Trump presidency will affect them.
Company A: A European conglomerate is considering a greenfield project for manufacturing widgets and distributing them throughout the Western Hemisphere. The business model includes a labour-intensive process and expedited delivery from manufacturing to end-consumer. Consequently, two aspects of the investment climate that directly impact the likelihood of success in the US are cost of labour/minimum wage and free flows of goods and money across state and national lines.
While the manufacturing process is not complicated, the widget manufacturer relies on human labour and does not integrate much artificial intelligence. Its most important export markets are Canada and Mexico.
Company B: An Asian investment fund is considering an acquisition of a US life insurance company that solely serves clients in the state where it is incorporated and physically located. The business model for the life insurer relies on aggressive investment strategies that require lower reserves requirements.
For these reasons, two important investment climate factors that impact Company B’s success are less regulation/deregulation of insurance industry, and low interest rates.
Life insurance companies often experience problems in markets that have low interest rates and tight regulations because consumers tend to prioritise investments in other financial assets (such as short-term deposit products).
The state of the game
What is Mr Trump’s stated or likely position on these aspects of the investment climate? While he has vacillated on some of his policy positions, he has demonstrated a strong conviction to deliver on his campaign promises. In cases where the president has not articulated a focused position, the framework can speculate about future decisions based on his hard-right populist ideology. In short, he is likely to make decisions that are isolationist and fiscally conservative on domestic economic policies.
Company A: While Mr Trump’s stated positions on wages, the North American Free Trade Agreement (Nafta), and the strength of the dollar are clear, they produce conflicting impacts on Company A’s business model. More specifically, the president has explicitly stated that the dollar is “way too strong” and that he desires to weaken the dollar (relative to other currencies). He has also made several statements to suggest that he will maintain the existing federal minimum wage.
Both of these positions would have a positive impact on Company A’s desire to keep down costs of sizeable labour requirements and enhance the widget manufacturer’s overall competitiveness in exporting to the North American market. On the other hand, Mr Trump’s outspoken position against Nafta suggests he is committed to repealing or amending the free-trade agreement that expedites and encourages US exports to Canada and Mexico. The likely outcome of this initiative could offset economic gains from a devalued dollar and lengthen the time it takes to deliver products to consumers in its primary markets.
Company B: While Mr Trump has not specifically spoken of his position on the reserve requirements on insurance companies, he actively supports less government regulation of business. In turn, Mr Trump is likely to support regulations that do not actively control the reserve requirements and investment strategies of insurance companies.
While the president does not have a stated policy position on the impact of monetary policy on the life insurance industry, his efforts to devalue the dollar might have a direct impact on Company B’s business model. More specifically, the Federal Reserve often lowers interest rates in its efforts devalue the currency.
The net effect
So what is Mr Trump’s influence over these policy areas? In representative democracies, the constitution establishes the checks and balances that ultimately determine the powers of the president. In some cases, the separation of power is clear, while in others attorneys debate about conflicting interpretations. Based on a review of the branches of government and their relationship to the president, constitutional analysts are able to determine the president’s scope of power that number of possible outcomes in different scenarios.
Company A: A review of Mr Trump’s influence over monetary policy, labour relations and international relations reveals that he can implement policies that will impact Company A. The president and the Republican Congressional majority have the power to dictate the future of the federal minimum wage. Consequently, it is likely to remain at $7.25 per hour.
While the president’s power to control the value of the dollar is more attenuated than that of minimum wage, he does exercise significant influence over monetary policy. More specifically the Federal Reserve controls monetary policy and the president is empowered to pick the next chair of this agency. While the president’s ability to amend or repeal Nafta and erect other trade barriers is less clear, the weight of the evidence suggests that a president can unilaterally change Nafta.
Ultimately weigh the benefits of low labour costs against the burden of trade barriers to its primary markets.
Company B: Unlike the authority that the president holds over factors that influence Company A’s business model, the constitution provides fewer explicit powers to affect the specific policies that influence Company B. While Company B would welcome Mr Trump’s support of laissez-faire policies, the insurance industry is regulated by state regulators who audit and monitor the financial wellbeing of insurance companies. In Company B’s situation, the state’s position on the amount of capital reserve requirements would be more important than Mr Trump’s support of deregulation. As mentioned above, the president does not directly determine interest rates; he does, however, appoint the person who controls the agency that does.
A review of presidential powers reveals that Company B will have to pick a state that imposes favourable restrictions on capital reserve requirements and hope that Mr Trump appoints a Fed chair who does not work to devalue the currency or lower interest rates.
An informed decision
The three-point framework does not pretend to definitively forecast Mr Trump’s policy positions and regulatory outcomes, nor does it provide answers that point to an irrefutable conclusion. Rather, it provides a roadmap to help inbound investors make more informed risk-reward analysis that result in smarter decisions.
By applying the framework, investors can use facts to reduce the ambiguity and determine how macro-level factors and policy shifts impact their ability to succeed in the US. Whether the analysis helps inbound investors identify hidden opportunities that have eluded fearful competitors or encourages foreign companies to close US operations in favour of another location that provides more stable environment, the framework will ensure that important decisions are more reasonable than random.
Robert Ginsburg is president of RBG Global, which advises foreign investors and host governments on crossborder investment and trade.