The global stock surge tied to Donald Trump’s victory in the U.S. has a better chance of enduring if the president-elect can coax nations such as Germany, Japan and China to embrace reforms, said Mohamed El-Erian, Allianz SE’s chief economic adviser.
“In order for this Trump rally to be sustained, it’s not just about implementing policies at home,” El-Erian said Tuesday in an interview on Bloomberg Television. “It’s not just that he has a pretty clear path domestically, because the Republicans control both houses of Congress. Also, he’s going to need to convince allies and China to move on their re-balancing.”
The S&P 500 Index has jumped about 6 percent since Election Day on optimism that Trump’s plans for stimulus projects and lower taxes will stoke growth. The dollar also climbed along with bond yields, trends that could hurt exports and threaten Trump’s vow to revive employment in America’s manufacturing industry.
“It goes too far when it does two things,” El-Erian, who is also a Bloomberg View columnist, said. “One, when it tightens financial conditions too much. And second, when it fuels protectionist rhetoric in the U.S.” that could lead to more restrictions on trade.
El-Erian called Trump’s pledge to increase infrastructure spending “low-hanging fruit,” noting that President Barack Obama had a similar goal but struggled to win support in a Republican-led Congress. The prospects for consensus might not be as strong in other major economies, however.
El-Erian has lamented in recent months that many wealthy nations were immobilized by political deadlocks. He has called for structural reforms in nations such as China, Japan and Germany, and said that Europe’s largest economy would also benefit from more fiscal stimulus.
“If you get that, then you get a re-balancing, you can maintain the equity rally and you don’t get too much pressure from the foreign exchange segment,” El-Erian said. “So it can go on for a while, and you can see that in the stock market today.”
Working with China could be a challenge for Trump, who accused the nation during the campaign of stealing U.S. jobs. The president-elect lashed out at China over the weekend after it seized an underwater drone from the U.S. Navy. The state-run China Daily’s English-language edition warned Monday that Trump’s inexperience in diplomacy might lead to confrontations between the two nations, while the Communist Party-affiliated Global Times mocked his demeanor. China later returned the glider.
El-Erian cautioned against overlooking risks to global markets. Valuations suggest that investors are assuming there will be no policy mistakes, “market accidents” or unwelcome surprises from political instability, he said.
“Part of the reason why the markets are reacting so well is because we are getting an endogenous political disruption in the U.S.,” El-Erian said. “That seems to be positive because we are going to unleash congressional action on key issues. But you’re also getting political disruptions elsewhere that are not so positive.”