What Trump’s victory means for markets

In the end the US election result wasn’t much of a cliffhanger. Republicans, and Donald Trump, have won a fairly comfortable victory, recapturing the White House, the Senate and, in all likelihood, holding onto the House of Representatives as well.

Such a clear victory removes at least one important negative scenario – we shouldn’t see a contested election and can hope for a smooth transition of power.

The initial market reaction has been quite sharp – with US equities and the US dollar rallying and US bond yields rising. Measures of equity market volatility have also fallen. That reaction has reflected the likely contours of US policy going forward. We’d expect to see lower taxes, higher trade tariffs and larger fiscal deficits. That should translate into stronger growth and, potentially, higher inflation. In this scenario, US equities might look better than global peers, which are overall more exposed to global trade. So, good for equities, for now, and not so great for US bonds. 

There are some other considerations. Higher US tariffs will likely elicit a reaction from trade partners. Higher tariffs should dampen global growth and boost inflation, as some of those tariff increases get passed onto consumers. In a similar vein, candidate Trump has argued for a weaker dollar, but the policy mix might suggest the opposite. One solution could be lower policy rates, but it’s tough to justify that if growth and inflation are both accelerating. 

Immigration has been another focal point of the campaign, with Republicans arguing strongly in favour of more curbs. Immigration has been an important driver of growth and of supply of labour in recent years. If curbs on immigration are successful, we could see wage inflation pick up again, complicating life further for the US Federal Reserve.

Finally, on the fiscal side, Republican policies, as stated, look set to increase the fiscal deficit – even if tariff revenues might provide some benefit. Financial markets have been willing to fund the US deficit, but long-term debt dynamics in the US and elsewhere look challenging and the cost of debt could drift higher. 

So, we’ve got some clarity from the election, and sooner than we might have expected. The policy mix is likely to be supportive for US businesses, with an emphasis on lower taxes and fewer regulations. But the policy challenges, around government debt, immigration and trade tariffs, haven’t gone away. 

In terms of our portfolio positioning, our exposure to equities remains relatively high compared to history across most of our portfolios. We continue to have a meaningful exposure to US equities that could benefit from some of these trends.

Inflation remains a concern and we have maintained our exposure to inflation-linked bonds. We have kept our exposure to European equities relatively low, and reduced it in some cases, on concerns over the outlook for European earnings. We have been cautious on longer dated US government bonds, although we see that the yields have risen quite sharply over the past month or so, and that could create opportunities going forward.