The recent US election has brought Donald Trump back into office, creating expectations of a return to policies focused on American domestic economic growth and protectionism. In his victory speech, Trump emphasised a commitment to “bringing back jobs and rebuilding American industry,” a signal that trade tensions and potential tariffs could once again be on the horizon. Such a stance may lead to volatility (both geopolitical and economic) if renewed trade tensions disrupt global supply chains.
Impact on UK and global markets
Trump’s focus on American self-reliance suggests that trade relations could face strain, particularly with major trading partners like China and Europe. For UK exporters reliant on the US market, new tariffs or restrictions will pose challenges, making exports more costly. Conversely, sectors like defence and energy may benefit from Trump’s historically pro-industry policies, creating selective opportunities for investors with exposure to these areas in the US.
If Trump enacts further corporate tax cuts to stimulate domestic growth, as his administration has hinted, it could drive a further rally in US equity markets, benefiting larger-cap companies and creating positive spillovers globally. However, UK-based investors will need to monitor the potential impact on supply chains and sector-specific performance, especially if trade barriers start to affect pricing and profitability.
For fixed income the outcome is less positive. Trump’s previous term saw significant fiscal expansion, and a similar approach this time could lead to higher US government spending and a potential rise in inflation. This environment might put upward pressure on bond yields, creating opportunities in fixed-income markets, especially in shorter-duration bonds that offer higher yields with lower interest rate risk. Simmering in the background is also the danger that unfunded tax cuts will further inflate the US debt bubble, as the debt/GDP ratio rises.
US corporate bonds are likely to be impacted by higher US government yields but remain attractive if Trump enacts corporate tax cuts that improve cash flow, enhancing profitability in the short run and credit quality in the longer run. Diversifying fixed-income exposure with US bonds could benefit UK investors seeking to capitalise on higher total return opportunities.
Multi-Asset Fund Strategy Post-Election
For a multi-asset fund manager, the election outcome suggests a reassessment of shorter-term geographic and sector allocations.
For equity markets, if Trump pursues pro-business policies, particularly in the energy, defence, and infrastructure sectors, equities in these areas could perform well. Trump’s ‘America First’ stance is expected to prioritise domestic energy production and defence spending, which could boost US companies in these sectors. For UK investors, adding exposure to US equities, especially in these targeted sectors, could capture growth opportunities. However, balancing this with exposure to defensive sectors may offer stability amid any policy-induced volatility.
For bond markets, there is a more nuanced balance to adding exposure between government and corporate bond markets. With government spending set to rise and inflation potentially set to remain elevated, government bonds have become cheaper. Conversely, the economic environment, particularly in the US, remains robust and corporate bonds have become more desirable as company earnings continue to grind higher. We believe the risk-reward for shorter-dated corporate bonds is extremely compelling versus their government equivalents.
Trump’s trade policies could influence the US dollar, particularly if renewed tensions with China or Europe arise. A strong dollar could benefit UK investors with unhedged dollar-denominated assets, as a rising dollar would increase the value of those assets in pound terms. However, currency volatility might also increase, so investors may want to hedge some dollar exposure to reduce overall portfolio volatility. Being nimble around hedged and unhedged US exposures could help multi-asset managers mitigate risk while capitalising on potential dollar strength.
Important information
Past performance is not a guide to future performance. The value of investments may fall as well as rise and investors may not get back the amount invested. Income from investments may fluctuate. Currency fluctuations can also affect performance.
The views expressed in this document are those of the fund manager at the time of publication and should not be taken as advice, a forecast or a recommendation to buy or sell securities. The views are subject to change at any time without notice.