Donald Trump’s presidency should be good news for the dollar and US equities, but less positive for US bonds and emerging markets.
Arun Sai, Senior Multi Asset Strategist Pictet Asset Management.
Donald Trump’s sweeping victory in US presidential elections may have surprised some, but the reaction of global markets to his triumph was pretty much in line with expectations. US stocks, the US dollar and bitcoin all rallied, while US Treasuries sold off in anticipation of lower taxes, deregulation and higher inflation.
The moves were an extension of the price action seen in the days and weeks leading up to the election, as investors had already largely positioned for a Republican presidency. The rallies in riskier assets also reflect some relief that the worst case scenario – a contested election – has been avoided.
For what might lie ahead, our analysis of past US elections shows that the impact on asset prices usually starts to fade after a couple of months. Over the long term, economic fundamentals rather than politics tend to determine market direction. In this regard, we still see the US economy on a path to a soft landing.
However, there are some areas where Trump’s policies will likely have a longer lasting effect. His plans to increase tariffs on imports from China and elsewhere would result in a meaningful but not extreme hit on US earnings of about 7 per cent, some of which would be offset by potential tax cuts. The impact would not be uniform across sectors and on our calculations would be double that for consumer discretionary, staples and industrials.
Tariffs and trade friction do not bode well for emerging markets, but ultimately a non-recessionary easing cycle remains an attractive macro backdrop for them. Additionaly, we believe that China will redouble its efforts to boost the economy with fiscal stimulus as an insurance policy against any new US trade barriers.
The extent of Trump’s impact on markets also depends on whether Republicans manage to secure control of Congress. Here are the two possible scenarios:
Benign US exceptionalism (divided Congress)
This is likely to be broadly neutral for economic growth and only marginally positive for equity markets. Trump’s America first approach suggests he’ll make protectionist tariffs a key policy, especially against China. Without a Congressional majority, he’ll find it harder to institute big fiscal programmes. Overall the trade and immigration policy mix is unlikely to be stimulative for the US economy but would be inflationary – and therefore mildly negative for bonds. The main trade for this outcome is long US equities, especially small cap which would particularly benefit from lower taxes and a broad policy agenda favouring domestic companies. While most emerging assets would suffer, we would expect domestic growth stories such as India, insulated from any anti-China measures, to fare better.
Pushing the envelope (Republicans control Congress)
In this scenario, Trump has the power to institute a more radical programme. The federal debt will go up sharply – double the increase we would have got under Kamala Harris, according to the Committee for a Responsible Federal Budget. That’s on top of potentially harsh tariffs, including the threat of a 10 per cent universal baseline. This in our view is a very negative outcome for US treasuries. And though Trump is a big supporter of US oil and gas production (and anti-renewables), his push for greater domestic energy supply is unlikely to cause prices to fall by much, offset by oil demand staying stronger for longer. On balance, this is likely to drive inflation higher forcing corporate bond spreads to widen and the yield curve to steepen. This result favours US equities and the dollar and is negative for non-US equity and bond markets, not least emerging market debt. Within equities, banks stand out as a clear winner benefiting both from higher yields and potential deregulation.
Impact of election outcomes on markets and policy
| President | Trump | |
| Congress | Divided | Sweep |
| Outcome | Benign US exceptionalism | Pushing the envelope |
| Macro | Growth neutral to mild negative; inflationary | Growth mild negative; inflationary; higher budget deficit |
| Tax | Corporate tax rate remains at 21%Extension of democrat-supported income tax cuts (low income, child & small business tax credit) | Corporate tax cut to 20%, or even 15% for some manufacturersExtension to all TCJA income tax cuts |
| Energy & climate | Removal of approval hurdles for new energy production facilitiesWithdrawal from the Paris Agreement | Removal of approval hurdles for new energy production facilities Partial repeal of IRA, (EV tax credits & renewables subsidies) |
| Trade (inc China) | More tariffs (EU autos, 60% on China imports)Tighter rules of origin & min content requirement under USMCA | Threat of 10% universal baseline tariffChina’s “most favoured nation” status revoked; “reciprocal trade act” enacted |
| Regulation | Reassessment of Basel III end game & banks’ capital requirementsMore lenient approach to antitrust enforcement & M&A | Light touch regulatory environment for banks & M&ADevelopment of a strategic national Bitcoin stockpile |
| Equities | Neutral/mild positive: slightly lower tax burden for corporates; multiples stable with more belligerent policies off the tableSmall > Large; Value > Growth | Neutral/mild negative: increased trade policy uncertainty will keep multiples under pressure, offsetting modest tax cut/TCJA extension benefitsValue > Growth |
| Regions | Long:US, India, Brazil, ASEAN; Short:Japan, EM,China | Long:US, India, ASEAN; Short:Europe, Japan, EM, China, Korea, Taiwan, Mexico |
| Sectors | Long: US small cap, US banks, US upstream oil & gas; Short: utilities | Long: US banks, US upstream oil & gas; Short: US consumer discretionary, renewables, ESG leaders |
| Rates & bonds | Negative: inflationary impulse from tariff & immigration; mildly negative growth headwindBear flattening; spreads mildly widerHY > IG; US > EU credit | Very negative: double whammy of inflation & term premia repricing on tariffs & fiscal concernsBear steepening, spreads widerLong: linkers, short duration credit; Short: EM |
| FX | USD neutral; Short:RMB, EM FX | Long:USD; Short:EUR, JPY, RMB, EM FX |
| Commodities | Long: gold, crypto | Long: gold, crypto; Short: copper |
Source: Pictet Asset Management, 06.11.2024.
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