Insights
By: Peter McLean
Trump 2.0: What Matters Most?
As the dust settles on a resounding victory for the Republican party, investors’ attention has shifted to the potential impact for the global economy and investment landscape looking into 2025.
Central to our philosophy is an acknowledgement that we do not know what the future holds. In the case of a second Trump presidency, the range of possible scenarios is notably wide. Our investment approach ensures we consider a range of outcomes for our underlying investments, pursuing robust and well diversified portfolios. With this in mind, our initial thoughts are as follows:
Rhetoric vs policy – what can we rely on?
President Trump campaigned on a populist agenda to “fix everything[1]”, promising substantially higher trade tariffs, tax cuts, immigration control and regulatory easing. We know that campaign promises do not necessarily translate into actions. Whilst the direction of travel is likely to align with this broad agenda, the timing and magnitude is less clear.
It’s worth keeping in mind why President Trump’s comeback has been so convincing. Importantly, his victory in the US reflects a wider ‘anti-incumbent’ mood following a period of high inflation and declining real incomes. In recent months we have seen similar outcomes in Japan, France and the UK, with polls suggesting Canada and Germany will follow suit. Indeed, in 35 elections since 2022 globally, more than 70% of incumbent parties have lost seats, and approximately half have lost power altogether[2].
Our takeaway is that President Trump’s team will be minded to avoid the political mistakes of the prior four years. Policies will therefore aim to strike a balance between delivering strong growth and keeping inflation under control. Broad-based high tariffs do not align with this objective, since they will lift consumer prices and dampen spending. President Trump’s strong belief in tariffs has been long held, but most likely trade policy will be selective, with tariffs placed on specific goods and regions (for example, in China generally and on the European auto sector). Such a strategy would lift prices only modestly, avoid denting consumer resilience, and lay the foundation for trade negotiations.
Some may point out a lack of incentives to act logically, given President Trump’s governing style and final term in office. This is possible, although the President-elect will be advised not to ignore the midterms in 2 years, when a hostile Democratic-controlled Congress could leave him vulnerable to further investigations or impeachment. We know that President Trump also considers market performance a yardstick for his own success, encouraging a more measured approach to policies that stoke inflation risk.
Bond vigilantes – more powerful than the President?
President Trump is likely to also have the bond market to contend with in his second term, which has the potential to overrule radical policies that threaten economic stability. Events in the UK in 2022, when the short-lived Truss government attempted large scale unfunded tax cuts and spending, offer a useful reference point. Whilst investors in US Treasuries may be reassured by the depth and significance of the market, concerns around elevated debt and deficit levels may prove overwhelming. Ultimately, the risk of sharply higher bond yields will limit the kind of fiscal largesse that President Trump campaigned on.
Economic outlook for 2025 – what has changed?
Our assessment is that the incoming Trump administration will engage in pro-growth, business friendly policies overall, but they will need to be palatable for investors, consumers and voters. The probability of a ‘reflationary’ scenario is undeniably higher, with both growth and inflation running hot, but it is important not to disregard prior trends. Unemployment has been steadily rising this year, and businesses are unlikely to alter hiring plans based on political developments just yet. Bond yields are near post-financial crisis highs, having risen sharply since the summer, keeping financial conditions tight. Sectors such as autos and housing are unlikely to drive growth for the time being.
This keeps our optimism for the US economy in check. The most likely scenario we see is a moderation in growth from recent strength, as businesses and consumers digest a changing political order. Yet a business-friendly backdrop in 2025 and beyond will reinforce the US resilience we have embraced. Against a backdrop of continued disinflation and lower interest rates, corporate earnings growth can remain robust.
Investment strategy for the long term
Our portfolio positioning has structurally emphasised the US market, participating in the leadership of disruptive technology businesses, whilst allocating across industries with diversifying growth and value drivers. In particular, domestically tilted US smaller companies have captured the boost to animal spirits in recent weeks. This theme offers key exposure to US reindustrialisation – a Trump policy with rare bipartisan support - with notable exposure to industrial and technology companies.
Investments in such growth assets are well balanced by uncorrelated sources of return in multi-asset portfolios, including traditional government bonds, which stand to benefit from a period of unforeseen economic weakness. Furthermore, strong results this year from catastrophe bonds, physical gold and long / short strategies can remain well supported as alternative assets. This blend of investments, and their sensitivities to an ever-changing investment landscape, remain under constant review as we approach the end of 2024.
[1] President Trump’s acceptance speech, 6th November 2024
[2] Source: BCA Research, November 2024
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