Investors await in hope for more Trump-generated vibes for markets

After a year in which over 100 countries held elections, one election outcome in particular offers both hope and fear for investors.

The Republican clean sweep of the US Presidency, House of Representatives and Senate promises to be very consequential for the domestic economy and international trade and finance.

Our view is that this is likely to extend US exceptionalism a while longer. However, this is not without risks, especially given the valuation gap between US assets and the rest of the world.

While a Republican clean sweep was always a possibility, what was truly impressive was Trump’s ability to win the popular vote. In the run-up to the election, many questioned whether the Democrat’s (candidate Kamala Harris) national lead would be big enough to win the Electoral College votes. The Democrat’s lead itself proved to be a mirage.

The key question now is: To what extent is Trump wedded to his campaign policy agenda, and how willing is he to be influenced by people within his own Cabinet, corporate leaders and financial markets?

My sense is he will start fast out of the gate. The clock to the mid-term elections, due in two years, will start ticking immediately after Trump’s inauguration on January 20, and he will be keen to get things done fast.

However, his narrow majority in the House and contradictions in his own policy objectives suggest he will face significant constraints over time. As an investor, this is reassuring.

One way to think about Trump’s second term is that he will be trying to manage three different, and often competing, outcomes.

On one corner of the triangle, you have the desire to bring more jobs onshore.

The second corner is to control inflation - it is not lost on Trump that the failure to control inflation was a key factor in the Democrats losing the election.

And the final corner of the trifecta is strong financial markets. This equates primarily to a rising stock market and a lack of turbulence in the bond market. This could result in something akin to a ‘Trump put’ in case of a sharp market sell-off.

The underlying challenge Trump faces is that he seems to want his cake and eat it too. Let’s consider some of the competing policy objectives. The US labour market is already very tight. Bringing more jobs onshore risks re-stoking wage growth to levels that are inconsistent with inflation coming down to the central bank’s target of around 2%.

This risk could be exacerbated by his plans to start deportations and curb immigration. It is now acknowledged that wages and inflation came down in 2023 in part due to a significant surge in immigration. Even if Trump does not make good on his promise to send immigrants back home – something I believe he will struggle to achieve in significant numbers – he is unlikely to sanction a new wave of immigrants.

Furthermore, with little spare capacity in the US economy, any tariffs imposed on imports are likely to feed straight through to inflation.

Meanwhile, extending tax cuts would seemingly be good for the equity market, but could also be inflationary at the margin. If taken too far, it could lead to a UK-like sell-off in the bond market.

Of course, some policies make total sense from a purely economic perspective, at least in the short term. Deregulation should boost productivity, especially when it relates to innovation, increasing the productive capacity of the economy.

The Generative AI space is clearly front and centre of the narrative in this regard, but deregulation could also be a significant boost for the financial sector and many are expecting a pick-up in M&A activity, which could give a further boost to stock markets.

Although our general belief is that tariffs are bad for welfare at both the global level, and for the US itself, they are likely to raise significant revenue that could, alongside government spending cuts through an efficiency drive, at least partially offset the costs of the tax cuts.

In our opinion, Trump’s election victory has reduced the risk of a hard landing and increased the risk of a ‘no landing’ scenario for the US economy. Against this backdrop, we head into 2025 overweight global equities, with a preference for US equities.

The main caveat to this preference is valuations and already bullish investor positions, especially relative to other regions such as Europe, Japan and China. This argues for a globally diversified portfolio, with a slight tilt towards US equities rather than an all-or-nothing approach to US equities.

However, we note that the path to equity market gains is unlikely to be smooth. Therefore, we counterbalance the overweight here with an overweight to gold, which we see as being supported by continued central bank buying and heightened geopolitical risks.

Our increasingly benign macro-economic outlook argues for an overweight to developed market high yield bonds. Yield premiums vs. government bonds are tight, but absolute yields are attractive, and the macro environment suggests that corporate default rates will remain low.

Overall, we believe 2025 will be another positive year for investors, though they should brace themselves for a bumpier ride than the one we faced in 2024.