Economic implications (Raphaël Gallardo)
Donald Trump is campaigning on a platform of protectionism, massive tax cuts for firms and families, broad-based deregulation (with Elon Musk allegedly to be made into a ‘chief deregulation officer’), promotion of fossil-fuel extraction and massive deportations.
While deregulation, energy permitting and corporate tax cuts would typically boost the supply potential of the economy while pressuring prices down (a deflationary boom), our assessment is that these forces would be counterbalanced by the negative effects (i.e. lower GDP and higher prices) of prohibitive tariffs and massive deportations.
Furthermore, tax cuts on labour income (tips, overtime, regular wages) and Social Security transfers (pensions) would boost consumer demand, resulting in higher inflation.
Even in a watered-down application of all Trump’s promises, GDP would barely move from its baseline 2% trend, given a starting point of no idle capacity (in labour or capital) and the negative impact of tariffs and deportations on future supply potential.
In this scenario, inflation would accelerate by 1.1ppt and the deficit would widen towards 10% of GDP.
This second wave of inflation would force the Federal Reserve (Fed) to pause rate cuts early in 2025 and resume hikes by the end of the year. The dollar would initially rip higher on higher rates, lower trade deficits and an inflow of foreign capital chasing an artificially higher return on capital on the equity market.
This surge in the greenback would infuriate a mercantilist president and risk an early demotion of Fed Chair, Powell to the benefit of a dovish political appointee. This would spook foreign investors, in turn leading to a weaker dollar.
In the extreme, the exodus of foreign capital from the US Treasury and equity markets would reverse the wealth effects that have kept the US economy humming in the past two years.
Market & investment implications (Kevin Thozet)
The revival of the 1980’s style ‘reaganomics’ is likely to initially elongate the bull market in equities and the economic cycle into 2025. But Trump’s ‘pro-business’ agenda would be at the cost of higher real rates, which entails new risks for the global financial system.
Within equities, smaller companies and financials would benefit from deregulation and tax cuts, consumer stocks from a prolonged cycle, manufacturing stocks from protectionism and the fossil-fuel complex (services as well as infrastructure) from the prioritisation of domestic oil and gas production.
For the almighty technology sector, expectations are more mixed, given trade tensions with China could negatively impact the global supply chains of firms such as Nvidia or Apple.
As growth prospects and inflation rises, and the independence of the Fed becomes increasingly challenged, we’ll likely see higher rates globally. As a result, bond yields across the ‘curve’ will rise, but those with long-term maturities are likely to lead the charge (in a so-called ‘bear steepening movement’).
Upward pressure on bond yields is likely to put high-duration assets (growth stocks) and ‘bond proxy’ equities at risk, especially given the current elevated valuations.
On the fixed income side, the combination of improved growth expectations (at least on the cyclical side), higher inflation expectations and questions over the adequate compensation required for holding longer-term bonds, advocates for a flexible yet cautious approach towards core interest rates and a preference for real yields (i.e. those accounting for inflation) over nominal ones.
The US dollar would be caught in the crossfire of Trump’s interference with the Fed, protracted US exceptionalism and tariffs. The latter, being central to his economic plan, would likely take the driving seat in pushing the greenback higher. If the dollar eventually weakens due to foreign capital exodus, this could lead to a possible de-rating of the US equity market.
A spotlight on sustainability (Lloyd McAllister)
Since the last US election, there is no denying that the commitment to tackling climate change has been a polarising topic.
The Biden administration, primarily through the Inflation Reduction Act (IRA), has shifted the US onto a ‘sustainable path’ that has deep consequences. This has seen incumbent systems push back, especially following the surge in interest in ESG investing between 2015 and 2020.
Clearly, a Republican ‘sweep’ (seeing them take both the presidency and Congress) would be the most consequential outcome from a sustainable investment perspective. A Trump administration would seek to dismantle a ‘pro-ESG architecture’ to reinforce the ‘old economy’ at a time of significant global change.
These consequences should not be viewed in isolation, however, as we expect state-level power to continue to significantly influence economic activity, which should remain more stable.
Nevertheless, in the case of a Republican ‘sweep’ we expect:
- Trump will likely begin proceedings to withdrawal from the Paris Climate Accord.
This is part of ‘Project 2025’ and is symbolically important for his ‘US-first’ approach. It would require Senate approval which would likely get dragged out, but simply the act of beginning proceedings would be sufficient to evidence implementation of his agenda.
- Pressure to be exerted on the SEC to drop the climate disclosure rules.
These have been contentious even under a Democratic administration with significant push back on simply mandating companies to disclose pollution levels – an established practice around the rest of the world.
- The IRA, which Trump dubbed the Green New Scam will be under the microscope.
The IRA is forecasted to causally reduce GHG emissions by 8%(from a forecast base) through swifter adoption of clean technology. Trump believes it is a waste of money and he needs to find dollars to fund his tax-cut policy. His newly forged friendship with Elon Musk could be consequential in shaping how the axe swings, given his proposed leadership role in a “government efficiency commission”.
60%1 of IRA projects are in Republican states. We expect these projects to be supported given their nature (carbon capture and storage) and the boost to manufacturing jobs.
Musk’s relationship with Trump reduces the risk around EVs, but not entirely, as Musk has publicly stated that removing the clean vehicle tax credit would benefit Tesla relative to its competitors.
As a China-hawk, Trump is likely to rescind the current flexibility from the Treasury in delaying the domestic supply chain rules until 2027. This will force a slowdown in green manufacturing as domestic supply chains take time to build up. Although, on the manufacturing side, Trump is likely to be transactional. He could let Chinese manufacturers into the US, so long as the production is taking place in the US.
Clean energy support is likely to be on the chopping block, particularly offshore wind, which Trump has described as “horrible”.
- Biden’s light vehicle emissions standards - a key driver of automakers’ shift to EV – will be scrutinised.
California, which leads the charge on emission standards, requires sign-off from the Environmental Protection Agency (EPA) to impose stricter requirements than the current federal requirement. This request could be rejected.
- Fees on methane emissions to be removed.
These are a key driver of reducing greenhouse gases, as without the removal of methane leaks, natural gas electricity generation can be as polluting as coal.
- More broadly, and possibly more consequentially in the long term, is the potential for the gutting of federal institutions.
The EPA being knee-capped and filled with political-loyalists rather than scientists would have a significant long-term impact.
For investors, these changes mean a slowdown in the adoption of green technologies via lower capital investment based on revised demand requirements and higher rates. As a consequence, the uncertainty in future cash flows from the reduced capital investment, alongside the negative sentiment, would result in a reduction of demand for securities in exposed sectors.
