Question

You are an investor and are looking for opportunities where you can invest or short sell in the coming 3-5 years (you have a medium to a long term horizon) . You are certain that Donald Trump will try and reduce the trade deficit. Given this piece of information, you believe that this would impact MNC corporations, hence you start looking at the MNC (Apple). Variables that you believe are key and might change are the following: relative strength of the dollar, tariffs on imports, incentives on exports, taxes on corporations. Make assumptions about these variables (increase/decrease) and how they will impact the MNC. What is you final recommendation go Long or Short the MNC?

Answer 1

Trade deficit or surplus is computed by subtracting the value of imports from value of exports. Trade balance is said to be in deficit when then the value of imports is more than the value of exports. If the trade balance is in surplus, then value of exports is more than value of imports.

In given case, Donald Trump is thinking on reducing the Trade deficit. Trade deficit can be reduced in two manner- increasing exports and reducing imports. In order to increase exports, Trump administration will provide incentives on exports but will be imposing more tarrifs on imports. Also taxes on corporation will be higher to compensate for the trade deficit. As the trade deficit will become narrow, the US will strengthen in comparison to other countries and hence will appreciate over a period of time.

A company like Apple which has a global operations stands to lose from this move of Trump Adminsiatration. Apple does receive majority of its earnings from outside and appreciation of dollar will have a negative impact on Apple. Also it will hamper its global sales volume as the products will become dearer in other countries thereby reducing demand.

Hence the final recommendation will be to go Short for an MNC like Apple.