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Investment considerations for the second Trump presidency
With all eyes focused on the White House, investors must decide what the incoming President’s policies will mean for markets and how to position accordingly. Ahead of the inauguration, we asked our portfolio managers what they think should be front of mind.
Jan 16, 2025
5 minute read
5 minute read
Key takeaways:
- President-elect Donald Trump’s proposed trade policies, particularly tariffs, are anticipated to place additional strain on international businesses.
- The broader economic consequences of Trump’s trade policies, including potential inflation, higher Federal Reserve policy rates, and a stronger dollar, present a mixed bag of challenges and opportunities for investors.
- This pivot underscores the need for businesses and investors to adapt to a potentially more insular and uncertain US trade approach.
With the upcoming inauguration of President-elect Donald Trump on January 20, 2025, the financial world is abuzz with speculation and analysis regarding the potential market impacts of his proposed policy changes. Trump’s intention to implement comprehensive tariffs, especially targeting Chinese goods and introducing “universal tariffs” on all global imports, marks a significant pivot towards protectionist trade policies. This shift is expected to exert additional pressure on international businesses, which are already navigating the complexities of existing US tariffs and a global trend towards similar trade measures.
Trump’s plans include a baseline 10% import tariff on all foreign-made goods, a 60% tariff specifically on Chinese products, and a full 100% tariff on imported cars. These proposals signal a substantial intensification of the ‘America First’ trade stance, potentially affecting various sectors in divergent ways.
The broader economic implications of Trump’s trade policies, including the potential questioning of the risk-free status of US Treasuries, are a subject of intense speculation. The introduction of such tariffs could also lead to inflation, higher Federal Reserve policy rates, and a stronger dollar, thereby posing challenges and opportunities for investors.
Here, we share insights from a range of portfolio managers on what to expect under a Trump presidency and the importance of actively navigating the anticipated challenges.
Global equities: Geopolitical uncertainty, focus cash on flow
“The main risks are likely to be volatility around geopolitics. Trump’s appointments point to a hardline hawkish policy, particularly as it relates to foreign policy and trade. This suggests risk is very much back on the table, and volatility will be rising. Investors will likely seek companies that are resilient to this – and for us that means staying focused on those that generate healthy levels of free cash flow.
In terms of sectors likely to be impacted, we would highlight defence. As the US pivots away from Europe and NATO and more to the Pacific, European governments are going to have to step up and spend much more money to rebuild their own security.”
US small caps: Reshoring tailwinds
“US small-cap stocks stand to benefit from the ongoing deglobalisation of supply chains, often called reshoring or onshoring. An increasing tariff regime creates opportunities for companies with greater exposure to the US economy. Since small caps generate less revenue from outside the US than their large cap peers, potential trade barriers could further enhance their attractiveness.
The incoming administration is likely to prioritise domestic growth through policies including tax cuts, targeted fiscal stimulus, and deregulation. These approaches could provide support for small-cap stocks, which are more economically sensitive than their larger counterparts. We expect small-cap earnings growth could exceed that of large-cap stocks in 2025, aided by easier earnings comparisons.”
Multi-asset fixed income: Higher for longer back on the table
“It appears the way is open for Trump to implement the policies he proposed on the campaign trail – lower taxes, tariffs on imported goods, and immigration reform. If enacted, some of these polices could lead to higher growth – but also higher inflation, which would hamstring the Fed from cutting rates as much as previously projected.
In our view, the repricing of rates markets bodes well for floating-rate bonds such as collateralised loan obligations (CLOs), as higher rates translate into higher income for investors, all else equal.
Take AAA CLOs for example, which currently yield 5.4%.1 If CLO credit spreads remain constant at existing levels and rates unfold as markets expect, AAA CLOs could experience only a modest reduction in yield over the next 24 months.”
European equities: Underappreciated upside potential
“In my view, the single most underappreciated risk for European equities is upside risk. The downside risks have been well and truly scrutinised, with the simplistic conclusion being that Trump Tariffs = bad news for the export heavy European market. What this analysis is missing is that a large portion of those revenues are either in services or local-to-local (i.e. a Europe-based company producing/manufacturing in North America and selling in North America). These revenues fall outside of tariffs. In fact, it’s likely only 6% of European revenues will be exposed to tariffs. We have seen a big, big disconnect between the performance of US equities and European equities and that is why we see risk on the upside rather than downside.”
High Yield: Pro growth agenda could spark M&A uptick
“Trump’s pro-growth agenda – and a faster pace of interest rate cuts in Europe – could drive animal spirits among corporates and lead to a pick-up in M&A, as might deregulation. This could lead to more bond issuance. In one respect this might be seen as negative because more supply needs to be met by more demand. Yet M&A might be a positive for those high yield companies that are takeover targets. This is especially true for more stressed (higher spread) names where the credit rating may improve if acquired by a stronger entity.”
Emerging markets: Reengineering supply chains – winners and losers
“There is little doubt that trade barriers introduce inefficiencies across the global economy. But while the reengineering of supply chains will see some companies and countries on the losing end, others will be net beneficiaries as multinationals seek to diversify industrial inputs, especially with respect to lowering their dependence on China. Within Asia – India, Vietnam, and Indonesia are all positioned to benefit from this reordering. Mexico is also a potential winner, although it bears watching the exact approach the incoming US administration takes with its southern neighbour. Also to be determined is the degree to which tariff rhetoric is a negotiating tactic, with the end result being potentially less onerous than the market fears.”
Footnotes and definitions
1As of 14 January 2025. Calculated using 3-month SOFR plus the J.P. Morgan CLO AAA Index Discount Margin.
Animal spirits: A term coined by economist John Maynard Keynes to refer to the emotional factors that influence human behaviour, and the impact that this can have on markets and the economy.
Credit rating: An independent assessment of the creditworthiness of a borrower by a recognised agency such as Standard & Poors, Moody’s or Fitch. Standardised scores such as ‘AAA’ (a high credit rating) or ‘B’ (a low credit rating) are used, although other agencies may present their ratings in different formats.
Collateralised Loan Obligation (CLO): A bundle of generally lower quality leveraged loans to companies that are grouped together into a single security, which generates income (debt payments) from the underlying loans. The regulated nature of the bonds that CLOs hold means that in the event of default, the investor is near the front of the queue to claim on a borrower’s assets.
Downside risk: An estimation of how much a security or portfolio may lose if the market moves against it.
Free cash flow (FCF): Cash that a company generates after allowing for day-to-day running expenses and capital expenditure. It can then use the cash to make purchases, pay dividends or reduce debt.
Hawkish/dovish: An indication that policy makers are looking to tighten financial conditions, for example, by supporting higher interest rates to curb inflation. The opposite of dovish, which describes policymakers loosening policy, ie. leaning towards cutting interest rates to stimulate the economy.
Inflation: The rate at which the prices of goods and services are rising in an economy. The Consumer Price Index (CPI) and Retail Price Index (RPI) are two common measures. The opposite of deflation.
Large caps: Well-established companies with a valuation (market capitalisation) above a certain size, eg. $10 billion in the US. It can also be used as a relative term. Large-cap indices, such as the UK’s FTSE 100 or the S&P 500 in the US, track the performance of the largest publicly traded companies, rather than all stocks above a certain size.
Mergers and acquisitions (M&A): It is a general term that refers to the consolidation of companies or assets through various types of financial transactions, including mergers, acquisitions, consolidations, tender offers, purchase of assets, and management acquisitions.
Protectionism: The practice of restraining trade between countries, usually with the intent of protecting local businesses and jobs from foreign competition. Measures taken typically include quotas (limits on the volume or value of goods and services imported) or tariffs (tax or duty imposed on imported goods and services).
Reshoring: Transferring business operations that were moved overseas back to the home country.
Risk-free rate: The rate of return of an investment with, theoretically, zero risk. The benchmark for the risk-free rate varies between countries. In the US, for example, the yield on a three-month US Treasury bill (a short-term money market instrument) is often used.
Risk premium: The additional return an investment is expected to provide in excess of the risk-free rate. The riskier an asset is deemed to be, the higher its risk premium, to compensate investors for the additional risk.
Small caps: Companies with a valuation (market capitalisation) within a certain scale, eg. $300 million to $2 billion in the US, although these measures are generally an estimate. Small cap stocks tend to offer the potential for faster growth than their larger peers, but with greater volatility.
Spread/credit spread: The difference in the yield between two bonds with the same maturity, but different credit quality. It is often used to describe to difference in yield between a corporate bond and an equivalent government bond.
Treasuries/US Treasury securities: Debt obligations issued by the US government. With government bonds, the investor is a creditor of the government. Treasury Bills and US Government Bonds are guaranteed by the full faith and credit of the United States government. They are generally considered to be free of credit risk and typically carry lower yields than other securities.
Volatility: The rate and extent at which the price of a portfolio, security or index, moves up and down. If the price swings up and down with large movements, it has high volatility. If the price moves more slowly and to a lesser extent, it has lower volatility. The higher the volatility the higher the risk of the investment.
Yield: The level of income on a security over a set period, typically expressed as a percentage rate. For equities, a common measure is the dividend yield, which divides recent dividend payments for each share by the share price. For a bond, this is calculated as the coupon payment divided by the current bond price. For investment trusts: Calculated by dividing the current financial year’s dividends per share (this will include prospective dividends) by the current price per share, then multiplying by 100 to arrive at a percentage figure.
Jan 16, 2025
5 minute read
5 minute read
Key takeaways:
- President-elect Donald Trump’s proposed trade policies, particularly tariffs, are anticipated to place additional strain on international businesses.
- The broader economic consequences of Trump’s trade policies, including potential inflation, higher Federal Reserve policy rates, and a stronger dollar, present a mixed bag of challenges and opportunities for investors.
- This pivot underscores the need for businesses and investors to adapt to a potentially more insular and uncertain US trade approach.