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Trump’s proposals could signal ‘peak globalisation’ say experts

Donald Trump’s likely impact on business strategy appears to be dividing opinion amongst risk professionals.

With just ten days to go before his inauguration as the 45th President of the United States, Donald Trump’s likely impact on business strategy appears to be dividing opinion amongst risk professionals.

At a recent webinar hosted by Marsh Risk Consulting, a straw poll of delegates and listeners found that while almost half of risk professionals have discussed President-Elect Trump’s proposed regulatory overhaul, many remain undecided about how it will influence their strategy in future.

Michael Poulos, President of Marsh Risk Consulting, explained how the markets have interpreted the election outcome as a positive, pro-business upside surprise. “If you break it down by industry, those who have been on the end of the most onerous regulation in the past eight years could stand to benefit the most.”

However, Marsh’s short survey found risk managers may yet to have fully considered their options. More than one quarter confirmed their business had not discussed how the 2016 US Presidential Election could affect strategy going forward, with a similar number saying they didn’t know.

Michael Poulos added that he was a little bit surprised that only 45% had discussed the election’s effect on them. “I would have thought the result was far enough out of the range of expectation that some businesses might have had to change their footing. I would expect those numbers to go up. It’s important to bear in mind that there will be a lot of choices from the governing coalition of Republicans who aren’t in locked-step. If you’re counting on lower taxes or reduced regulations, you’re going to have wait and see.”

marsh-trump-chart1

Source: Marsh Risk Consulting (December 2016)

Respondents were also asked to rate whether changes in regulation will affect their organisations and again the result was diverse. Only 10% said the impact would be negative, with 40% saying their business saw a positive future. 43% were undecided.

marsh-trump-chart2

Source: Marsh Risk Consulting (December 2016)

Panellist Arthur Long, a Partner at law firm Gibson, Dunn & Crutcher explained how the Trump administration was making a definite move towards deregulation. “But this doesn’t always mean less business risk,” he said.

“Litigation and enforcement risk could rise. The mortgage-backed securities litigation emerging from the financial crisis is one example of a risk arising from a period of less regulation.

“There haven’t been that many specific policy recommendations. We do know that the democrats do have a filibuster-proof minority in the senate. Any broad regulatory reform is going to have to get 60 votes – meaning at least 8 democratic senators. I expect there will be incremental reform to Dodd-Frank, but it will have to be reform that targets democrats within states that Donald Trump won, for example regulatory relief for community and regional banks, which has bipartisan appeal.

On  Geopolitical level, Yoel Sano Head of Global Political and Security Risk, at BMI Research reminded panellists how both the Trump presidency and Brexit are examples of rising populism. “This also appearing in France, Germany, Italy and The Netherlands as people react to similar political sentiment; anti establishment feeling and identity politics. This began several years ago and we interpret it as a delayed response to the financial crisis in 2008. People turned to mainstream parties as they were more familiar with them, but there seems to be a perception that existing political parties haven’t done enough.

“We’ve seen outcomes that have defied opinion polls and we are likely to hear more about political risks in developed countries, rather than the issue being purely the preserve of BRIC nations or developing economies,” Sano explained.

Finally, Michael Kornblau, US Trade Credit Practice Leader, Marsh explained what President Elect Trump’s likely trade policies could mean for businesses in trade credit terms. “Uncertainty is not a helpful word for finance or insurance and now there’s a greater degree that these long term policies could change, this could impact companies across the entire supply chain and introduce more credit risk. You might be negating decades of globalisation in the form of unwinding agreements that support global trade, restricting trade and so on. Some of his comments on China, labelling them a ‘currency manipulator’ or more recently the direct discussions he’s held with Taiwan and what China’s response will be could have a knock on effect to the entire trade credit market.

“Companies that were set up to support international trade who rely on exports could have their sales put under pressure, consequently squeezing the supply chain and leading to a greater number of insolvencies,” added Kornblau.

In terms of recommendations, Marsh’s trade credit experts reminded companies in the US and elsewhere to look at their accounts receivable. “Ask yourself how healthy are these companies, can they withstand a decline in revenue, what’s their banking facility like? Then you look at the insurance and see if it can mitigate some of those risks. We find that accounts receivable are one of the largest assets on a balance sheet and are often not insured.”

Yoel Sano asked if the Trump administration’s promises to roll back global trade genuinely play out, the economy may have reached ‘peak globalisation’?

“After hyper globalisation during the 1990s and 2000s, we may now be witnessing a reversed globalisation trend and this is a question companies really need to ask themselves. The slowdown in global trade could actually began long before the 2016 US election; in 2010 a lot of existing economic models started to do less well, for example the China-led emerging market model prioritising exports to developed states paid for with debt by those importing nations. Now, if changes are accellerated by nationalist policies, if you haven’t begun to asess how reliant you were on that global economic model, it’s time to start thinking about it now.”

 

Image copyright: Gage Skidmore

 

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