Trump 2.0 brings challenges and opportunities for markets
Anticipation and unease – it’s a strange combination dominating market sentiment ahead of Donald Trump’s second inauguration as US president. Here we look at how a policy of “America First” could impact markets.
Trump's pro-America agenda includes fiscal, commercial, and geopolitical plans. Investors are aware of the various challenges these plans present. The ongoing wars in Europe and in the Middle East, although a Gaza ceasefire deal has just been reached, add layers of complexity to the economic landscape.
Tariffs: the biggest threat to equities?
Therefore, investors are now trying to grasp Trump's economic strategies. There is cautious hope that his administration might introduce measures to stimulate US economic growth, potentially benefitting global equities. Sectors such as technology, industrials, and consumer staples may gain from more trade and investment between the US and Europe. The possibility of a surge in US infrastructure spending, for instance, could lead to heightened demand for European machinery and technology, buoying these industries.
Despite this optimism, the threat of rising protectionism is a significant concern. Investors remain wary of the potential for new tariffs or trade barriers that could hinder European and emerging exports. This uncertainty prompts European companies to rethink their strategies, focussing on diversifying supply chains and seeking opportunities in emerging markets to mitigate risks from potential changes in US policy. Companies may want to shield themselves from the impact of any trade frictions. According to Citigroup, sectors most vulnerable to tariffs include healthcare (accounting for 22% of Euro Area exports to the US), consumer discretionary (notably automobiles & parts, 12%) and industrials (machinery and aerospace, over 16%). As Trump's inauguration day approaches, the main focus for investors and businesses is on preparedness and strategic agility.
Fed in ‘wait and see’ mode; ECB forced to move further
Recent strong job market figures suggest a healthy US economy, reducing the need for further rate cuts by the Federal Reserve (FED). After Trump’s inauguration, we will have to see how election rhetoric translates in policies. If trade tariffs are imposed, inflation could rise, possibly causing the FED to be on hold. However, we still expect one more rate cut by the FED to balance inflation and the labour market. The European Central Bank (ECB) also plays a crucial role in shaping investor confidence. With a weak European economy, we expect further rate cuts from the ECB throughout 2025.
Conclusion
Our strategy is a blend of practicality and foresight. Understanding the changes in US economic policies may take time. We currently maintain an overweight position on equities, favouring US markets over European , which suffer from low economic traction fed by political instability, energy uncertainties, and weak consumer confidence. Meanwhile, we remain neutral on emerging markets. Although these markets have struggled since Trump’s election, we attribute this underperformance mainly to rising US long-term interest rates and a stronger dollar. Emerging economies, especially China, seem to be more prepared for Trump 2.0.