Navigating the Trump Presidency

Donald Trump’s US presidential win, together with a Republican sweep of the US Congress, puts Trump in a strong position to implement his economic agenda. As his campaign proposals were very broad-brush, it is too early to assess how his policies will play out. However, he has made clear that trade tariffs, immigration controls, regulatory easing and tax cuts are priorities.

Despite the uncertainty about which policies Trump may implement, a consensus outlook has developed based on first-term governance, his rhetoric over the past four years and pledges he made during this year’s campaign. Broadly, that consensus suggests reflation, a strong US dollar, higher interest rates, reshoring and oil-supply growth, to name a few, with the potential for material downstream effects on broad asset classes and equity sectors.

Our multidimensional approach allows investment team members to exploit an unusually wide and innovative range of inputs in their idea generation, and it shapes the creation and management of our strategies. In order to assess the consensus view’s validity, we gathered our multidimensional research and portfolio management teams to debate market assumptions and offer contrarian investment outcomes.

The “Incoming” Overview

Our discussion began with a brief overview from Rafe Lewis, head of specialist research, who keeps a close watch on the Beltway. Rafe stated that Republicans not only have the executive branch but now have control of both the Senate and House of Representatives, as well as a conservative-leaning Supreme Court.

Rafe also noted that personnel are important, and despite Trump getting off to a fast start nominating a number of individuals for key administration posts, it is too early to assess the full makeup of his administration and how his policies will be implemented.

The Macro Take

President-elect Donald Trump has vowed to impose additional tariffs on China, Mexico and Canada, that together account for about 43% of all goods imports to the US. Taken at face value, these tariffs are forecast to increase inflation. However, there were differing views among the team about tariffs and their potential effects.

Ella Hoxha, head of fixed income, suggested that tariffs are likely coming but that their impact on rates and inflation are currently difficult to assess. Immigration curbs and tariffs may slow growth and raise inflation, while deregulation and tax cuts could enhance growth. US interest-rate expectations have adjusted based on growth and the election results. Other regions see declining rates due to weaker growth. The US Federal Reserve is expected to act cautiously in 2025, balancing inflation and growth uncertainties.

Ella also suggested there is a wrinkle in the US dollar outlook. The recent dollar strength may face challenges as the new administration aims to boost US manufacturing competitiveness, which would require a shift in policy on the dollar. If the US dollar is part of the policy toolkit for the incoming administration, we should pay attention to how it approaches policies to weaken the dollar, as they could create volatility in markets. If successful, we could see a reversal in dollar strength in the second quarter of 2025 and later into the year.

As a final thought on the macro outlook, while it appears that Trump may be releasing the ‘animal spirits’ that led to a strong economy during his first term, Brendan Mulhern, global strategist, pointed out that the current setup is very different to that in 2016. The first Trump administration benefited from a very favorable global macro environment. 2017 was the first period of synchronized global growth since the global financial crisis; the US economy benefited from the broad improvement in global growth. Today, the economic cycles in the US and Europe are mature and growth in China remains subdued. From a market-cycle perspective, bearishness pervaded in 2016, and that was evident in positioning. Today it is the opposite—investors are bullish and have substantial exposure to equities. It is likely that it was never about Trump in 2016, and it is unlikely to be all about Trump on this occasion.

Sector Rotation?

The Trump scenario suggests there may be a rotation in equity-sector leadership. Globally, the US benefits from the prospect of lower tax rates. The intersection of Trump’s policies may have greater implications for specific sectors. Deregulation and taxation could benefit banks and small/mid-cap stocks, while oil and gas companies may gain from the short-term positive sentiment of the President-elect’s focus on energy independence. If Trump decides to roll back support for renewables and EVs under the Inflation Reduction Act, stocks in those sectors could see a pullback. Among industrials, stocks with more exposure to global supply chains, China’s economy and immigrant workers may suffer the most, while those in the automation business could benefit.

Consumer Discretionary

Deputy head of global equity research Maria Toneva discussed the impact of tariffs on the retail sector. She believes that although tariffs could be significant, they are more likely to be moderate. If the US was to impose a 60% tariff on China, major retailers would need to pass these costs on to consumers, potentially causing a new rise in inflation. Toneva thinks Trump and his team are calculating this scenario but predicts the tariffs could likely be similar to the more manageable 2018 levels.

For brands with stronger pricing power, she expects the tariff impact to be more manageable. For luxury goods, a strong dollar could benefit European retailers that pay in euros but sell in dollars, counterbalancing any tariffs. In the US, tax cuts, rising markets and increased focus on cryptocurrency might boost luxury spending.

Health Care

President-elect Donald Trump aims to reform the US health-care system, raising concerns for health-care investors. Research analyst Matt Jenkin is monitoring potential regulatory changes that could impact the sector. Jenkin focuses on the US Food and Drug Administration’s balance of safety and efficacy, fearing disruptions from new policies under Trump. Trump’s pick for Health and Human Services, Robert F. Kennedy Jr., emphasizes safety, particularly for traditional drugs and vaccines, which may increase regulatory scrutiny. Trump’s cost-cutting efforts, including a proposed international reference pricing system for prescription drugs and using the Inflation Reduction Act to negotiate Medicare drug prices, could significantly affect health-care spending.

Higher interest rates pose challenges for biotechnology funding, yet merger and acquisition activity may surge under Trump, benefiting the industry. Additionally, tariffs and border taxes could affect companies manufacturing in Mexico, Ireland and Costa Rica.

Energy

According to research analyst and portfolio manager Dave Intoppa, the energy cycle and capital allocations targets have far more important implications for the energy sector than the election results. Intoppa argued that the election results should not significantly affect shale drilling in the US, while acknowledging that regulatory changes could marginally influence production. In his view, the potential reduction in oil volumes from sources like Iran is a greater concern. Intoppa remains cautious about market predictions and has not changed positioning, while emphasizing his positive outlook on natural gas.

Technology

Portfolio manager Rob Zeuthen indicated that he is paying close attention to the direction of the US dollar. As Zeuthen explained, most of the technology sector, and particularly semiconductors and hardware, is priced in US dollars. According to Zeuthen, if the US dollar continues to strengthen, that could dampen sector performance, and adding tariffs to the mix could further suppress demand.

Despite these concerns, Zeuthen stated, “There are too many positive thematic drivers within tech to be too bearish.” While he is selective in the semiconductors and hardware segments, he is bullish on software and internet stocks.

With the potential for M&A activity to increasingly come into play next year, he thinks that certain small-to-mid-cap software companies may be motivated to sell due to concerns about where their futures might lie given the rise of artificial intelligence ‘smart agents’. “A lot of these companies are sold, not bought,” he notes, proactively seeking buyers and leveraging market competition to maximize the sales price. For this reason, he also believes that software companies may benefit from lower taxes, another positive consideration to appreciate.

Mobility

Frank Goguen, equity portfolio manager, raised the contrarian view that China could establish manufacturing operations on US soil. He explained that Trump, who has pledged to build the US workforce, has commented that he is open to the possibility. Goguen believes that the probability is low but not off the table, particularly as a Chinese battery manufacturer and technology company recently expressed interest in building a battery factory in the US if permitted. The other side to this is whether China’s government would allow any technology transfer to enter the US via the local production.

Charging Ahead

While the 2024 election outcome has already driven significant market movements, the future remains uncertain, with multiple variables at play. Our multidimensional research and portfolio management teams carefully weigh these factors, considering both the macro and micro outlook and the associated risks of the changing landscape. As always, maintaining flexibility and staying informed will be key to navigating evolving market conditions and unlocking opportunity.

Authors

Brock Campbell

Head of global equity research