With the inauguration of President Trump, we are bracing for an overwhelming flurry of policy news. The ‘Make America Great Again’ philosophy aims to give the United States a bigger slice of the global economic pie. The negotiation strategy follows a shock-and-awe approach. Both suggest lots of confrontation and noise ahead. What topics do we expect to pop up immediately and what impacts do we assess? We highlight what investors need to keep an eye on:
Taxes
Trump’s campaign promised either extending expiring tax cuts or introducing new tax cuts. These policy tweaks are key for the growth outlook and should support consumption and investment, keeping the US economy close to overheating territory. That said, financial markets, i.e. yields, have already started playing a role in enforcing fiscal discipline on governments.
Tariffs
When it comes to Donald Trump’s proposed policies, trade tariffs are top of mind for many. This does not make sense in our view both in terms of their economic and financial market impact, even though we are convinced that the primary goal of the tariffs is not about trade per se. Rather, they are about other goals such as immigration and crime, meaning that they should be seen first and foremost as a tool to put pressure on other countries.
One way to gauge the likelihood of Trump’s tariffs is through the precious metals markets. The United States is home to the largest precious metals futures markets in New York, while Europe houses the largest physical markets (London and Zurich). For financial arbitrage reasons, these markets typically trade in sync, allowing a cost-efficient hedging or protection against future price changes. Depending on the supply situation and the demand for hedging, this requires imports of precious metals into the United States, which in the futures could be subject to tariffs. Prices of New York-traded gold and silver prices has risen to 1.6% and 2.7% as of late, up from a median of 0.1% and 0.2% over the past two years. As a result, regional price differentials in the gold and silver markets between New York and London point to a low 15% to 25% probability of Trump’s threatened trade tariffs being implemented. This very much supports our view that the tariffs are first and foremost a negotiation tool to put pressure on other countries.
While supporting our view stated above, it must be noted that the gold and silver markets are economic niches whose price differentials also reflect market-specific factors. They are not necessarily indicative of broader economic developments and could be exempt from broad-based tariffs. Other commodities, such as copper or crude oil, trade at much higher price differentials, implying a likelihood of 40%–50%. That said, in our view, the impact of market-specific factors for copper and crude oil are even more prominent than for gold and silver, which is why we believe the implied likelihood exceeds the real tariff risk.
Energy policy
The costs of living are top of the agenda. However, economics dictates US oil and gas supply today, not regulation. Deregulation will not ignite a drilling boom. The Biden-era Inflation Reduction Act enjoys strong Republican support, as most clean energy investments are done in the Midwest. The act is unlikely to be fully abolished. Given its popularity, the topic of energy might be first on the agenda, though fuel prices have not been an inflation issue.
Geopolitics
Energy markets are the prime barometer for geopolitics and related supply risks, not least as oil dominates global trade and some countries are highly dependent on petro-revenues. The sanctions on Russia, Ukraine’s transit stoppage, and Saudi Arabia’s ample spare production capacity offer lots of negotiating options. The bargaining to find deals in Europe and the Middle East will likely kick off immediately. This process creates temporary uncertainties, but the outcome is likely more rather than less oil supply.
Immigration
The biggest risk to growth and inflation could be the plan to roll back immigration. With the native born labour force stagnating, immigration has accounted for most of the growth in employment. Any shortfall in labour supply has the potential to overheat the economy and reignite inflation. We will see how the new government balances the topic’s political popularity and its economic risks.
Emerging markets
Emerging market (EM) stocks have underperformed since October, driven by uncertainties on US tariffs, a stronger dollar, and fading expectations of Federal Reserve rate cuts. Looking ahead, the next key event for EM assets will be whether sweeping trade policies and tariffs will be prioritised during Trump’s first days in office. While uncertainty remains regarding the timing and scope of these measures, there are indications that efforts are being made to mitigate potential economic risks.
Several indicators suggest a potential shift in market sentiment. First, there are all-time-high long USD positions against EM currencies. Second, reports were released last week indicating that Trump’s economic team discussed a phased or targeted approach to tariffs. Third, last Friday’s call between Trump and Chinese president Xi Jinping fuelled optimism that Sino-US tensions may not be as bad as feared. Fourth, tariff-sensitive EM industries, including metals and mining, and infrastructure, have still notably higher earnings growth expectations for the coming two years compared to the 2018–2019 trade war period, despite continuous downside revisions.
What does this mean for investors?
We expect tariffs and geopolitics to be used intensively to strike deals, creating lots of noise and temporary uncertainty in the process, however, we agree with the view that tariffs are a means rather than an end for Trump 2.0. They are about achieving sizeable deals in areas such as geopolitics, immigration, and putting pressure on other countries. However, rates, labour, and oil market realities will hinder these ambitions.
For Emerging Markets, until we gain more insight into the intentions behind the new US administration, we suggest investors stay cautious, as the current risks with EM equities outweigh the short-term benefits.