Donald Trump’s historic victory marks only the second time the US has elected a president to non-consecutive terms after Grover Cleveland in 1884 and 1892. The result in the end was decisive with the Republican party also winning the Senate. However, with the race for the House of Representatives still in the balance at the time of writing, it remains to be seen whether the Republicans can complete a trifecta that would mean the party face limited opposition in implementing its policies.
The geopolitical and macroeconomic implications of the result are wide ranging and could impact global trade, wars in Europe and the Middle East and global inflation and interest rates. Furthermore, as the largest financial market in the world by a distance, the effect on US equities and bonds will impact global investors.
Expectations
Expectations for a “red sweep” has seen investors buying into so-called “Trump trades” with the US dollar, Treasury yields and US stock benchmarks all moving firmly higher in the initial response. The day after the election saw the US dollar post its largest one-day rise in two years, the US 10-year Treasury yield rise 15 basis points (0.15%) to its highest level since July and US stock indices rise over 2% to new record highs.
This is a result of markets expecting a sizable fiscal loosening with the Trump administration seen as boosting demand via tax cuts and government spending while the imposition of more stringent tariffs would restrict the supply side of the economy. All else being equal this could lead to inflation increasing along with government debt, suggesting interest rates will fall more slowly than previously predicted.
However, tariffs if wide ranging and severe, may also damage demand, itself one of the determinants of inflation. There are therefore several interplays including scale, size and timing of tariffs, impacts on growth from lower demand due to tariffs and more stimulus from government and tax cuts as well as monetary policy response. The overall impact on inflation and growth is therefore not quantifiable currently with so many unknowns, however if we assume 10% tariffs across the board in 2025, we could envisage potentially up to 1% being added to the rate of inflation.
US equities:
Equity investors responded positively to the outcome sending US stock benchmarks to new record highs. As US stocks represent 65% of the MSCI All Country World index[1] their impact is felt far and wide.
In terms of sectors, those seen as benefitting from higher growth, higher inflation (or at least not hurt by rising prices) and lower regulation have been among the best performers in the near term. Financials (6.2%), industrials (3.9%) and energy stocks (3.5%) were prevalent among the biggest risers on the day the result became known, building on gains in the weeks up to polling day.
Tesla shares jumped around 15% as the firm is seen as a key beneficiary from higher China tariffs. These could potentially stop cheaper Chinese EV players, such as BYD and NIO, from flooding the US market. EV tax incentives will also likely be trimmed. This would be negative for the EV industry, but should give Tesla a clear competitive advantage because of its scale and vertical integration.
In recent months we have seen Elon Musk forging an alliance with Trump, becoming the biggest donor to the Republican party. Musk has been promised the role as head of a new Department of Government Efficiency, and has vowed to champion deregulation, and will gain influence over US policy on AI, space exploration and EVs – all which Musk has a direct interest in via Tesla and other ventures.
Given Trump’s outspoken views on the topic, there are potential concerns for certain sectors such as clean energy. President Biden’s Inflation Reduction Act (IRA) provided a major boost to renewables and if Trump follows through on his campaign pledges some of this could be rowed back, however the majority of these projects are based in ‘red states’ which should offer a degree of protection.
A more in-depth look at the sector-by-sector implications can be found here.
The day the result became known small-cap benchmarks surged almost 6%, moving up to a 1-year high and outperforming their larger peers. This outperformance can be explained by Trump’s “America first” agenda as protectionist policies like onshoring/reshoring and increasing tariffs on imports are expected to be more beneficial to domestic-focused businesses. Tax breaks and the associated increase in domestic demand could also disproportionately benefit domestic companies. A proposal to cut corporation taxes from 21% to 15% for domestic production could potentially increase small cap index earnings by around 5% all else being equal.
Small and mid-cap stocks are still currently undervalued compared to large caps. This is a largely a result of the exceptional performance of mega cap tech and large pharma companies over the last couple of years, rather than a reflection of small and mid-cap fundamentals.
For exposure to this area, we maintain a preference for the Artemis US Smaller Companies fund, which has a strong-long-term track record due to excellent stock selection and a focus on top-down factors.
Although the outlook for small- and mid-cap businesses appears more favourable a note of caution should be sounded. There is potentially a greater degree of uncertainty and the sizable move higher in bond yields in recent weeks suggests an expectation for a higher interest rate environment which can be more problematic for smaller firms as they typically carry larger debt loads and have smaller cash buffers.
UK implications:
As the world’s largest economy, what happens in the US has an impact on UK equities and bonds. Following the reaction to the recent budget, UK bond markets are one of the most sensitive areas to the latest developments in Washington. The UK 10-year gilt yield extended its rise, moving up to near 4.60% after the US election.
A comparison to US equivalents provides some context for recent gilt moves. The 10-year gilt yield increased by almost 90 basis points (0.90%) since mid-September — a similar magnitude to the rise seen in the US 10-year Treasury yield. This suggests the majority of the move is not specifically due to UK factors. There has been some spread widening since the UK budget (20-30 basis points), reflecting plans for more government borrowing, but this has since been reduced due to US yields surging higher on the election result.
There has also been a recent increase in short-dated gilt yields following the UK budget. This has pushed the yield on our short-term bond strategy back to around 4% after tax for additional rate taxpayers. This looks fairly attractive considering the Bank of England are still in a cutting cycle. Another positive for the strategy was that its tax status remained unchanged.
Further information on our short-term bond strategy can be found here.
At its November meeting the Bank of England delivered a widely expected 25 basis point (0.25%) interest rate cut, lowering the base rate to 4.75%. Given the proximity of the meeting to the US election and budget announcement it appears unlikely that they had much sway on this decision, although the impact of these events is expected to weigh on future thinking.
Overall, we believe there is now more uncertainty surrounding US bonds than UK bonds. In the short-term there probably won’t be much impact on the Federal Reserve’s monetary policy — they delivered another 25 basis point (0.25%) rate cut two days after the election. Derivatives markets are pricing a further 75 basis points (0.75%) of cuts over the next 12 months. Trump may seek to influence future policy, through tweets etc. however, last time there was no discernible impact and Fed independence remained intact.
From a UK perspective, the budget and US election could have offsetting impacts. Higher borrowing and inflation announced in the budget suggests the Bank of England may need to pursue a slower path of rate cuts. But on the other hand, the imposition of sizable US tariffs and the adverse impact that would have on UK growth suggests a potentially faster rate cutting trajectory.
The current backdrop is not seen as the most attractive for fixed interest investments but having said that the yields on offer are quite attractive. In light of a normalisation in inflation and interest rates and reducing concerns of a recession in the US, yield curves have also returned back to a more “normal” place with longer-dated bonds once again offering relatively higher yields than shorter dates bonds after a prolonged period of inversion.
Our view:
We continue to see attractive opportunities in both the equity and fixed income space and favour slight overweight positions. Financial markets are inherently unemotional and political developments have historically been far less important than corporate performance. We see a reasonable backdrop for ongoing earnings growth and although equity valuations are a little above their long-term average, we still believe they offer attractive future returns.
Finally, we will continue to closely monitor developments and stand ready to adjust our positioning as we see fit. It is worth remembering that rarely do politicians follow through on every policy exactly as they said they would during the campaign trail. Trump prides himself on being a dealmaker, and his stated level of tariffs should be viewed more as a starting point in negotiations rather than a decision outcome.
Looking back through history there is very little discernible correlation between the political party of the president and returns on US equities — benchmarks show remarkably similar returns under the previous Trump term and the current Biden one.
What does change though is the composition of these returns and that’s where we believe active management can play a valuable role. Trump’s proposed policies have multiple complementary and contrasting facets, leaving the end outcome difficult to determine accurately.
We believe our analyst team of 22 in-house, industry and sector specialists provide us with a distinct advantage. Together they provide expert, valuable insight into the latest changes and what the aggregate effect of these are across multiple areas. This allows our investment managers to focus on what they do best, delivering the best outcomes for clients.