By Darius McDermott, managing director of FundCalibre
Donald Trump is heading back to the White House. His last presidency was characterised by tariffs, trade wars and tax cuts, and there is every sign that the next one will have a similar flavour.
However, clear-cut policies are thin on the ground, and markets are inevitably speculating about the likely winners and losers. We don’t have a hotline to the Oval Office, but there are areas we’ll be keeping an eye on during Trump 2.0.
US smaller companies versus the technology giants
While Trump’s laissez-faire view of business has left US markets upbeat, a closer examination of the implications of a potential tariff regime may require a more nuanced view.
M&G pointed out: “The National Federation of Independent Business (NFIB) Small Business Optimism index moved up dramatically after the 2016 election – it will be interesting to see if that is repeated. While Trump will likely impose additional tariffs, they will probably be less than that expressed while on the campaign trail. They will, however, result in retaliatory tariffs from US-affected trading partners.”
See also: How will Trump’s tariffs impact markets?
In other words, the global trading environment is going to get tougher. That will hurt international business around the world, including the US. The technology giants need international markets to thrive, to support their supply chains, and to buy their services.
At the same time, smaller, more domestic companies should be beneficiaries of reshoring and should look more competitive. Given the relative value of smaller companies versus the mega-caps, we would favour diversifying US exposure into funds such as T. Rowe Price US Smaller Companies Equity or Schroder US Mid Cap.
The energy sector
A Trump victory ushers in a new environment for energy generation, and marks a major break with Biden’s Inflation Reduction Act and support for decarbonisation.
John Chatfeild-Roberts, manager on the Jupiter Merlin Balanced Portfolio, said: “Energy features large in Trump’s economic strategy. The US is almost 100% self-sufficient in oil (it exports some grades in which it has a surplus of supply over domestic consumption, while grades it does not have in sufficient quantities have to be imported).
See also: ‘Inflationary’ and ‘volatile’ or ‘good for growth’?: Trump declares victory in 2024 US election
“Trump has said that he’s ‘gonna drill, baby, drill’. Gasoline (petrol), diesel and heating oil are fundamental to most American households and businesses: keeping the price of fuel down is perceived as the equivalent of a tax cut but more importantly, helps moderate inflation.”
This approach is likely to weigh on the renewables sector, which has been an early casualty of the Trump revival. The iShares Global Clean Energy ETF dropped almost 7% on news of the result.
Global consumer goods
The global consumer goods sector may be particularly vulnerable to any new tariff regime. Consumer goods companies selling into the US are likely to look increasingly uncompetitive, particularly where there are cheaper domestic alternatives. This is more likely for basic consumer goods than for, say, specialist semiconductors.
There are other potential weaknesses. Reuters reported data showing that a number of the packaged goods companies could be exposed by higher tariffs on Mexico. These companies have invested significant sums in their Mexican supply chains and built up significant manufacturing bases there.
Importing goods into the US could become more difficult and expensive. The impact will remain unknown until the level and structure of the new tariff regime is announced, but it could create volatility for these businesses.
What about China?
The Chinese market has fallen in the wake of Trump’s victory, having had a strong few months on the back of the government’s recent stimulus package. It is not news that Trump has China in his sights, and that tariffs are likely to be onerous.
However, this needs to be weighed against the Chinese market’s low valuations, the recent stimulus package and lower US interest rates.
Edmund Harriss, manager on the Guinness Asian Equity Income fund, said: “With the Federal Reserve in the US cutting interest rates, China now has room to cut rates without putting significant pressure on the Renminbi. One of the constraints facing policymakers for the past few years was that the Fed was hiking rates, and if China cut rates, the interest rate differential would have increased.
See also: Morningstar: What does the US election mean for investing in China?
“Hot money would have left China in chase of higher yields in the US, putting pressure on China’s capital account and the Renminbi. Now this is no longer true as the Fed has started to cut rates, giving the PBOC room to follow.”
He pointed out that the government’s stimulus package extends to the stock market: “A total of CNY 800bn was set up by the People’s Bank of China, of which CNY 500bn ($71bn) is allocated for a swap facility which brokers, funds and insurance companies can use to buy stocks.
“The remaining CNY 300bn ($43bn) is to fund a re-lending facility, which listed companies and major shareholders can use to fund buybacks and stock purchases.”
The bond markets
The other key vulnerability in a Trump presidency could come from the bond market. The US treasury market has already wobbled on the news of his victory, with yields rising as inflation expectations are pushed higher.
Futures markets have started to price in fewer interest rate cuts over the next few months on the assumption that Trump’s economic measures will drive prices higher.
Economists believe that Trump’s agenda will add around $7.5trn to the existing deficit of $35.6trn. This puts the US in line for its own ‘Liz Truss’ moment. Trump has promised efficiency measures at the heart of government, saying this could be led by Elon Musk.
The US also has special privileges on its debt, thanks to the Dollar’s position as the world’s reserve currency, but it may not be able to outrun bond market maths indefinitely.
Trump isn’t a complete unknown. Investors have a pretty good idea of the direction of travel, even if the shape of his policies is not yet clear. These are the areas we’ll be watching from January 2025.
