US election: Implications for investors

President Trump will be returning to the White House having won a decisive victory. He could also possibly be in a position where the Senate and House are controlled by the Republican Party, paving the way for potentially significant policy changes. So, what are those polices and are they just stump bluster?

We saw in Trump’s first presidency that he did attempt to deliver on his promises, even going as far as beginning to build a wall. With this president, more than others, it seems to pay not to dwell on the appropriateness or economic credibility of the policies but the fact that he states his intentions. There are many potential watch points for global Investors but three stand out prominently to most commentators.

Trade tariffs

Most potentially impactful is his trade policy. He has stated he would like to put significant import tariffs onto trade partners. Quotes of 10-20% have been mentioned and he has singled out China out for an eye watering 60% tariff. Obvious candidates have already been impacted, as European car manufacturers fell aggressively the very next day. More broadly, tariffs are, on aggregate, a drag on growth and a spur to inflation. They will affect the global economy but will also affect different businesses differently, depending on their supply chain and business model.

However, whilst in the short term it may be fortuitous to have goods made in Vietnam and not China, members of his advisory team have also called out Vietnam, in what looks like a game akin to the fair ground staple “Whac a Mole”. No trading partner, friend or foe, is likely to escape. What is clear to me is that this is certainly an inflationary policy, as would be any significant immigration measures. Higher inflation means higher interest rates, which ultimately means, all else equal, higher bonds yields and discount rates – and a stronger dollar.

Corporate tax rate

Secondly, Trump has repeatedly suggested he would cut the corporate tax rate from 21% to 15% and extend existing tax relief stemming from 2017 Tax Cuts and Jobs Act. In his last presidency, similar measures certainly provided the US stock market with a positive boost.

Oil & gas

Thirdly, but not least, Trump has repeatedly shown his desire to promote energy independence and, in his own words, “drill baby drill”. I do not believe that many parts of the Inflation Reduction Act will be rolled back, given that this legalisation has hugely benefited Republican states – surprisingly, Texas is one of the biggest beneficiaries of these greener policies.

I would, however, expect a renewed focus on US oil and gas production. Prior to the election, it was estimated that the policies introduced following a Trump win could add an additional 4 billion tonnes of CO₂ to the atmosphere by 2030.¹ Whilst these numbers are purely conjecture, what we can expect with some certainty is a roll-back of initiatives and climate-related regulation, fewer international commitments, and a continued weaponisation of ESG issues.

The asset allocation process in LGPS funds means it is not practical to try and “trade” around these objectives – nor, in most cases, would it be my advice to do so. What is useful, however, is managing future expectations around economic volatility and geopolitics, as a Trump presidency is more likely to increase the speed at which we are moving from a unipolar world dominated by the US to a multipolar one.

¹ https://www.carbonbrief.org/analysis-trump-election-win-could-add-4bn-tonnes-to-us-emissions-by-2030/