In the lead-up to the election, we saw the favoured “Trump Trades” gather momentum and then rally sharply last week as it became evident that Trump would not only win the Presidential race but take the Senate and House in a clean sweep. US Banks (the favoured trade) rallied sharply along with Big Tech (also supported by strong quarterly earnings results) to see the S&P 500 up 3% for the week, briefly touching a record high 6,000 points.

This week, we share our thoughts on the implications of Donald Trump’s return to the White House and what effect this might have on investment portfolios.

This optimism in equities is based on the belief that Republican policy proposals will be positive for US companies, with corporate tax cuts, deregulation and tariffs on imported goods expected to provide an earnings boost. The Trump Trade Losers is a proposed 60% tariff on all Chinese imports and 10% tariff on all other imports. Consequently, we saw weakness in Chinese equities (and China derivatives, like resources) and European Equities – regions that have large trade surpluses with the US.

Although Australia escaped tariffs last time and may well do so again, slapping a 60% tariff on our largest trading partner will lead an already faltering Chinese economy into recession. A Chinese economy in recession will not buy our iron ore or coal exports, so Australia would join the Losers camp if this came to pass.

The friendshoring of supply chains that were already on the train will likely accelerate, benefiting regions like Japan, India, Canada, and Australia at the expense of China and, to a lesser degree, Europe. The USD and US interest rates also traded sharply higher on expectations of higher growth, inflation, and, subsequently, higher interest rates. However, this optimism may be short-lived, and we expect to see a fading of the Trump trades in the near term as it will take time for actual policy to be implemented and for the impacts on the real economy to be known.

There also remains considerable uncertainty about what will be implemented. Will the tariffs be implemented in full and when, or will they simply be used as a bargaining tool to facilitate the real objective, which is to increase America’s industrial base? What retaliation will we then see from China and other countries, and what impact will this have on global trade?

While Trump seeks to reduce the corporate tax rate from 21% to 15%, which would be a positive for US companies, this may translate to a 4-6% increase in corporate earnings. Still difficult to say, given there is not always a straight-line effect.  

In terms of investment implications, particularly given the further rally in equity markets, we believe an overall cautious stance is still warranted into next year as we wait to see the evolution of US policy. While the global economic engine was not broken, it sputtered into the election.

In the shorter term, we see valuations as stretched and analysts likely overly optimistic on the timing and impact of a Trump presidency. As the dust settles post-election, market focus will return to key data points like US employment, economic growth and corporate earnings. This view also translates to Australia, which is also trading on stretched valuations but without a strongly growing tech sector, has weaker overall earnings prospects, strong economic ties to China and a banking sector dealing with how to get loan growth.

In the long term, there is also the issue of the ballooning level of government debt, which eventually all sides will need to address. Trump’s policies, if implemented, are inflationary, and that may well bring an end to falling interest rates. Once again, we will have to wait and see, given a lot has been said, and we really need to see what actually gets done.

For Trump, the Republicans have gained control of the House and Senate, meaning spending bills can be passed despite any opposition from the Democrats. As their base case, the US Committee for a Responsible Federal Budget has estimated that Trump’s policies will increase total US debt by a further $7.75 trillion from 2026 – 2035.

Conversely, another key policy platform is significantly reducing bloated government spending, something no party has been willing to do in recent history.

Regardless, if the last term of office is anything to go by, we are in for a fascinating and volatile time.

Buckle up and stay patient, given investment opportunities will arise.