With the U.S. presidential election decided (and without the need for a recount) Mark Harries, CIO was joined in a special edition of ‘Spotlight On’ by James Ashley, Head of Market Strategy at Goldman Sachs Asset Management and Hugh Gimber, Global Market Strategist at J.P. Morgan Asset Management to discuss the likely repercussions for the markets and investors. What does a new Trump term mean for global economies, the U.S. electorate and future government policy?
Key factors in the election outcome
The clear result provides market clarity, especially after the uncertainty in the run-up to the election. Inflation was a key determinant in the outcome - aligning with previous post-COVID global election results where incumbents suffered due to inflation's impact, regardless of its cause. The influence of economic perception, with many voters mistakenly believing the economy was in recession despite strong growth, also affected voters’ decisions at the ballot - reinforcing the link between perceived and actual economic conditions in shaping election outcomes.
Policy implications
The election outcome will likely result in some deregulation. It will also affect key domestic policies regarding immigration and tax - the effects of which could act as a modest inflationary pressure. For instance, as the influx of foreign-born workers to the U.S. contributed to inflation control, slowing immigration with new policies will impede this from continuing.
When it comes to tax, cuts are expected, again acting as an inflationary pressure. Extensions of existing provisions are likely - though significant corporate tax changes are uncertain. In fact, the extent of corporate tax cuts and tariff policies will depend on the final outcome of the House vote, with potential adjustments based on the House’s control.
The impact on foreign policy
The election result will undoubtedly shape U.S. foreign policy, particularly in its approach to China and defence spending. A more competitive stance with China is anticipated, with President Trump prioritising a 60% tariff on Chinese goods. China's response may include increased monetary and fiscal stimulus to counterbalance U.S. actions.
Additionally, the U.S. is likely to advocate less multilateralism and pressure NATO members to meet defence spending targets, especially the 2% GDP goal. Europe will face greater pressure to fund defence independently, too. The evolving nature of security, including AI and cybersecurity, will also influence defence spending.
The impact on U.S. markets
The market response to the election result so far includes a stronger dollar, rising yields, a rally in equities, and a modest sell-off in oil prices—all of which were fairly predictable for a Trump win.
Looking to the future, U.S. growth is expected to strengthen, driven by the aforementioned possible fiscal stimulus, easier regulations, and tax cuts. This benefits U.S.-focused small and mid-cap companies, whose revenue bases are more domestic. That being said, small-cap companies may face challenges due to more expensive floating-rate debt, with monetary policy easing likely to happen more slowly than previously thought.
Conversely, the potential for higher inflation could make larger companies more attractive, as they are better positioned to manage price pressures.
The impact on international equity markets
The impact of the election on international markets will vary across regions. China and Europe face macro headwinds, with market reactions depending on fiscal stimulus.
If China successfully implements more fiscal stimulus and the ECB accelerates rate cuts, there may be opportunities in these markets. Without strong policy responses, however, equity markets could struggle. Europe faces the most significant challenges due to its reliance on external demand, particularly exports to the U.S., and the potential for trade frictions.
The UK, with its favourable valuation and potential inflation outcomes, may serve as a diversifier and could perform well, similar to 2022, during periods of rising rates and inflation.
The impact on sustainable investing
Donald Trump's energy policies are expected to shift focus away from clean and renewable energy, though not entirely rejecting current energy strategies. So, while there may be a rebalancing of priorities between clean and traditional energy with changes to the 2022
Inflation Reduction Act (IRA) likely, the IRA’s projects and job creation in Republican districts should remain. Offshore wind projects, though, may possibly face more scrutiny.
A key change will be deregulation, such as removing restrictions on drilling in Alaska's wildlife reserves, signalling a return to more extensive fossil fuel use.
The impact on fixed income and interest rates
Fixed-income markets and interest rates will be significantly impacted by the election results, with bond markets currently uncertain due to the unknown outcome of Congress.
What is already known, though, is that the U.S. deficit has grown from 3% of GDP in 2016 to over 6% today, with debt levels rising from 97% to 114% of GDP - and heading higher thanks to future tax cuts. This creates a higher term premium for bond investors, as they demand more compensation for lending to a government with increasing deficits. As a result, the outlook for European bonds, such as German bunds and UK gilts, is more favourable than that of U.S. Treasuries.
Additionally, fiscal and monetary policies will impact the Fed's ability to cut rates, likely resulting in higher rates than previously expected.
The election winners and losers
Inflation is likely to remain sticky and slightly higher due to policies like tariffs, stimulus, and limited labour supply expansion. This environment could lead to stronger growth and higher rates where, particularly in the U.S., corporates may experience higher earnings growth and pricing power.
Finally, fiscal policy's growing importance contrasts with the previous decade when central banks struggled to create inflation. The shift to more active fiscal policies will create greater market dispersion, benefiting active managers who can navigate these changes.
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