Trump 2.0

It was a very successful night for Donald Trump and the Republican Party.

While the polls were close, Trump was the favourite leading up to the election, at least in the eyes of betting markets and Wall Street.

However, the strength of his victory was a surprise.

Few predicted he would win the popular vote, while a “red sweep” across Congress also looks possible.

Financial markets reacted very positively, with US shares hitting new highs driven by strong gains in financials, industrials and energy.

Smaller companies also outperformed larger ones.

Bitcoin surged to a record, while the US dollar strengthened and longer-term interest rates increased.

Trump is a pro-growth, business-friendly candidate.

Markets haven’t forgotten that the S&P 500 index rallied almost 60 per cent during his previous four years in office.

He wants to extend his own tax cuts from 2017, which will otherwise expire at the end of next year.

He also plans to reduce regulatory and compliance costs, and he wants to spend more.

All of that is good for economic activity, corporate profitability and consumer spending.

The market reaction is justified, although some of this will come at a cost.

Lower taxes and more spending mean increasing debt levels, as well as higher inflation and interest rates.

The Federal Reserve will still cut its policy rate tomorrow, but it might reconsider how quickly it’ll drop rates in 2025.

Tariffs will also be a headwind for global growth.

Trump is highly unlikely to go through with the 60 per cent tariff on Chinese goods, and at least 10 per cent on everything else which he campaigned on.

The former would be highly detrimental to the US economy, and it would hurt his voting base more than it helps them.

Expect a watered-down approach against China, and potentially more targeted (rather than across the board) tariffs elsewhere.

Energy, defence, regulation and immigration policy will also be in the spotlight.

He’ll be more sympathetic to fossil fuel energy, and there will be less of a push for green energy.

Having said that, he’s unlikely to get rid of green energy subsidies altogether given many Republican districts have benefitted from these.

On the defence front, last night probably wasn’t a great result for Ukraine, as Trump might block some of its funding.

He’ll want to send a message to the likes of Europe and Asia, and ensure they know a Trump-led US will be less willing to get involved in other people’s conflicts.

While the outlook isn’t too bad for investors, as a country New Zealand might find itself on the wrong side of US policy over the next few years.

We are a small trading nation that is highly dependent on exports, and China and the US are two of our biggest markets.

Tariffs and increasing trade tensions don’t do our economic outlook any favours.

For investors, there is a lot to consider, although I wouldn’t be making any knee-jerk changes.

Trump won’t be inaugurated until early next year, so we’ll have to wait a little while to fully assess any potential changes he might make.

His victory is a positive for economic growth in the US, which will benefit many parts of the market.

That could mean we see a solid end to the year for US shares.

At the same time, we’ve already seen a strong rally so we shouldn’t count on a repeat of the returns we saw from 2016 to 2020.

The risks of tariffs and a trade war suggest an element of caution is wise, given these are negative for global growth.

Diversification is the best protection for investors against this uncertainty, so ensure portfolios are well spread across asset classes and regions.

Fixed income still looks reasonable, and the recent increase in yields has increased its attractiveness from an income perspective.

After all, income should be the primary reason we hold fixed income.

Within equities, ensure portfolios are globally diversified.

The US economy is well-positioned, while Trump’s “America First” policies will benefit many sectors and ensure the greenback is well-supported.

Stay invested in the US, but consider complementing this with some better value opportunities elsewhere.

It might also be a good time to consider alternative assets, including the likes of real estate, infrastructure, transportation and private equity.

Finally, remember that markets will ultimately be driven by the economy, central bank policy and corporate earnings.

Political change is something investors will always have to grapple with.

Those who stay disciplined, ensure they are well diversified and follow common sense investing principles will always be well-positioned for the long-term.

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