Donald Trump: “I play Monopoly, my favorite street is Park Avenue. Jimmy Kimmel: “Is Park Avenue even in Monopoly? Oh, no wait, you play Monopoly in real life don’t you.” A snippet from a recent interview with the President elect on The Tonight Show, a matter of weeks before the election. It’s an interesting insight into the Property mogul’s mind. Particularly as, like in Monopoly, there will be some winners and some losers when (and of course if) his policy pledges are implemented.
First role of the dice
Take his first role of the dice: a whopping 20 per cent corporation tax cut. If this materializes, it will lead to a massive surge in activity for US companies. However, on the less favorable side, competing multinational corporations will be operating under a higher tax rate. And it is these very companies, with US operations, who will be most affected in the short, medium and long term by Trump’s victory.
Look at one of his early policy proposals which could trigger a massive trade war – high tariffs slapped on international firms selling into the US. Beyond tariffs, Trump has promised to cut red tape, starting with Dodd Frank. While initially leading to a jump in banking stocks with the prospect of more capital being freed up, it could also come at a cost. Banks and their corporate clients have spent years realigning business models to meet the regulations, and any removal of the rules would be a major operational headache. Beyond what Trump has planned, corporates are facing further deregulatory measures which will have a direct impact on intercompany lending. By February 2017, under Accounting Rule 385, international companies with US based operations have to prove that intercompany lending is a debt, not an equity. The tax implications of this could be, to quote the President-in-waiting, “huge”.
Continuous swings in currency prices
Of more immediate concern, however, are the continuous swings in currency prices, which create fresh accounting and forecasting challenges. Just this week, Sterling dropped to a two-week low against the dollar following the Federal Reserve’s small interest rate rise of 0.25 percent. Once the pomp and ceremony of Trump’s inauguration is over, it will be fascinating to see how he responds to these actions from the Fed – who plan three further rate hikes in 2017. It has been speculated that Trump may try and weaken the dollar to offset any high tariffs other countries may impose. But the dollar is by no means the only currency to keep a close eye on. The Mexican Peso tanked 11 per cent on election night, and while it has crept back up slightly since, Trump’s now infamous pledge to “build a wall” between Mexico and the US border has sent shockwaves through the construction sector. For example, businesses producing cement have already seen their profits increase, but on the flip side, face the prospect of paying more for raw materials.
Any move in the price of raw materials or commodity exposed currencies, as seen with the Peso, affects those companies who rely on their finance team’s ability to effectively manage their risk exposure. This is exactly why risk management should be a central focus for corporates right now. Specifically, firms need to be able to stress test and carry out scenario analysis around their portfolios, in order to see how any of these potential Trump measures can affect their business.
Then there is hedging, and corporates should be weighing up all possible situations. As a case in point, look at the weakening value of Sterling against the dollar, there is no telling what level it will be trading at over the coming months. This sort of uncertainty is why corporates need to have complete visibility into their exposure at any given time to actively manage any possible scenario.
Trying to work out who the winners and losers will be from a Trump Presidency is anyone’s guess at this stage. Only once his policies begin to feed through to legislation will businesses be able to make a more informed judgement on future plans. Until then, without full insight into the unpredictable macroeconomic conditions that have resulted from the election, companies face an uncertain future. This is why preparing now to handle the impact of the Trump win may just be what’s needed to ensure that businesses are ahead of the game when it comes to managing risk.
(This article was originally published in GTNews's online magazine Global Treasury Briefing.)
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