The stock market has reached record highs as investors price in President-elect Donald Trump’s promises of $1 trillion in infrastructure spending, deregulation of financial services and other industries, and protective trade policies. However, there likely will also be downsides for multinational corporations (MNCs).
Infrastructure spending would clearly benefit many US firms – and likely the overall US economy – but it comes at a price. Emily Blanchard, associate professor at the Tuck School of Business at Dartmouth College, noted that infrastructure spending is almost always funded by borrowing. And while all borrowers prefer lower interest rates, that’s especially true for governments when borrowing on a grand scale.
Ms. Blanchard pointed out a fundamental friction with another of Trump’s stated goals: reducing if not eliminating the current-account trade deficit, especially with China, which was $367 billion in 2015 and $258 billion as of September 2016. This current account deficit is the result of foreign investors clamoring to invest in US assets, especially Treasury bonds, even at today’s very low interest rates. The US current account deficit signals the US position as a global net investee—a net seller of assets—and so-called balance-of-payments accounting says that the US can’t have balanced trade and also be a net seller of assets, i.e. a net borrower from the rest of the world.
If the US were to force balanced trade, it would have to fund its borrowing from US savers instead of foreigners. That could get expensive.
Right now, foreign savers – especially the People’s Bank of China — have been willing to buy T-bills at interest rates so low that, accounting for inflation, real returns are sometimes even negative, said Ms. Blanchard, pointing out that there is no evidence that US investors would be willing to step in to buy those bonds unless rates are significantly higher.
To replace foreign saving with US saving would require higher interest rates across the board. In turn, higher rates would mean that the entire cost of the US debt goes up and along with it the cost of corporate debt, which according to the Securities Industry and Financial Markets Association reached more than $8.4 trillion as of June 30, a record.
This comes at a time when corporate leverage has reached a record high, according to a report published by Morgan Stanley in September. The report points out that record-high leverage during a period of overall economic growth marks an unusual and concerning development. The same report notes near-zero interest rates as a bright spot, since low rated make it easier for firms to service large debt loads. But there are signs that that has already started to change: corporate bond prices dropped significantly on election day, as Mr. Trump’s victory become apparent, and have slid ever since. Should that trend continue, corporate borrowers refinancing debt at significantly higher rates may run into trouble.
Professor Farok Contractor, distinguished professor, Rutgers Business School, noted infrastructure spending could widen the federal deficit, which would indicate future inflation. In addition, the US dollar (USD) is already strong, and raising rates could strengthen it further, Prof. Contractor said. He added that the prospect of federal spending has already boosted US stock markets, which in turn could attract more foreign investors who must purchase USD to fund their investments, strengthening the dollar still.
“That’s bad news for other economies, both developed and developing,” Mr. Contractor said, adding it’s also problematic for US exporters, who already find the strong dollar challenging.