Trump's administration and its impact on investments

Upon taking the oath of office as the 47th President of the United States, Donald Trump delivered his inaugural address on 20^th January 2025, outlining his key priorities whilst promising to usher in a “golden age.” Below, we explore the impact of the Trump administration on geopolitics, financial markets, foreign policy, fiscal policy and portfolios.
 
Initial Market Reactions
The immediate response of financial markets to the election result in early November was aligned with our predictions, anticipating President-elect Trump's policies to strengthen the dollar, boost corporate profits, moderately increase the U.S. deficit (when the government spends more money than it earns), slightly raise inflation, and potentially slower interest rate cuts by the Federal Reserve (Fed). The day after the election, the U.S. dollar rose against major currencies due to the potential for U.S. tariffs. Share prices gained for both large and small companies, bond yields increased (the return an investor gets for holding bonds), and cryptocurrencies (e.g. bitcoin) surged. See chart below.
 
Foreign Policy
Trump’s administration is expected to engage in tough negotiations with both adversaries and allies. This might lead to trade wars, most importantly with the EU or China, posing risks for companies. We expect Trump to impose moderate tariffs on China and specific products from other countries (e.g. auto imports from Mexico), with a low impact on the U.S. economy. Nevertheless, there is a possibility that Trump implements a universal 10% tariff on all US imports or much higher tariffs on imports from China, which could significantly impact U.S. and global economic growth and inflation. Understanding these risks is crucial for investors.
 
Tax and Spending Policies
The large-scale tax cuts from 2017 during Trump’s first term are set to expire by the end of 2025, but it is likely the cuts will be extended to avoid this. Additional smaller tax incentives for businesses, funded by new tariffs, are also likely. Moderate reductions in investment spending and subsidies from the 2022 Inflation Reduction Act are anticipated to slightly lower overall spending. These adjustments are expected to boost U.S. economic growth by 0.2% in 2025-2026.
 
Government Deficit
The expected tax and spending policies may slightly increase the deficit in the short-term over 2025, but it should gradually decrease by 2028. Strong economic growth and falling inflation in 2025 should allow the Fed to lower its policy interest rate, keeping bond yields stable. In contrast, there is discussion of higher-than-anticipated tax cuts, like reducing corporate tax from 21% to 15%, which could push bond yields higher due to increased inflation risks. However, we believe these cuts are unlikely to pass Congress.
 

Source: WTW, FactSet
Price moves shown in percentage on 6 November 2024

The Noise

• UK public sector borrowing rose to a staggering £17.8bn in December 2024, according to recent data from the Office for National Statistics (ONS). This is the highest level of borrowing costs for the UK since the global financial crisis in 2008 and is exacerbated by the December figure coming in £6bn higher than the upwardly revised market expectations of £11bn. In comparison, a year earlier in December 2023, public sector borrowing was less than half, at just £7.7bn. With economic growth stagnating according to the ONS’s December GDP figures, and borrowing rising, pressure is mounting on Chancellor Rachel Reeves to kickstart the UK’s economy and fulfil promises of growth. 

• Europe’s equity markets hit a record high this week, up over 1% this week, as fears around Trump’s trade tariffs eased for the bloc. It surpassed previous highs reached in September as the focus of Trump’s new policy remained on Mexico, Canada and China (for now). This was seen as a bit of a ‘relief rally’, as markets had priced in the impacts of US tariffs on European exports. This was also bolstered by recent earnings reports lifting valuations of some of Europe’s large-cap companies. With the European Central Bank (ECB) having their next Monetary Policy Committee meeting at the end of this month, and the market having already priced in a 25bps cut, Europe could be poised for further growth if the focus remains off the bloc, at least in the short term.   ​

• President Trump was inaugurated this week, becoming only the second president to serve two non-consecutive terms following Grover Cleveland in 1893. He didn’t waste any time celebrating his big day, carrying out close to 100 executive orders in his first few days in office. Some of the key orders included; halting over $300bn in US green infrastructure funding, doubling taxes for foreign nationals and companies, withdrawing from the World Health Organisation (WHO), and introducing a $100bn AI infrastructure project enticing more investment in US technology. In terms of potential impacts for markets, many of the big US banks are revving up for the deregulation he promised in his presidential campaign, which will only support some of the impressive earnings results reported this week. Whilst US markets continue to tick up, the longer-term market effects of Trump’s policies remain to be seen, dependant on how he implements them moving forward.

The Numbers

GBP Performance to 23/01/2025

Source: Bloomberg, data as at 23/01/2025

The Nuance

US mega-cap companies are grappling with the need for a mind-boggling amount of additional energy required to power their AI data centres. Large corporations have seen a c.40% increase in CO2 emissions since 2020 as energy intensive data centres are still relying on power generated by fossil fuels. Recently, US tech giants have turned to carbon credits to reduce the size of their carbon footprint.

Carbon credits are a trading mechanism whereby people or companies buy credits that invest in projects that remove Green House Gases (GHG) from the atmosphere, offsetting their own emissions. Though this sounds good, they can be controversial in the sustainability world. Sometimes it allows companies to claim carbon neutrality, even though their operations remain as carbon intensive, if not more carbon intensive. Whilst some carbon credit initiatives are definitely positive in nature, the lack of transparency can cloud the true benefits of the project. Perhaps looking inward and directly reducing their own emissions is more effective than offsetting and exchanging.

The backdrop for sustainability at the moment, is that President Trump has begun his second term in the White House. He famously has an ‘anti-green’ stance, evidenced by his withdrawal from a major global environmental policy on his first day in office – The United Nations (UN) Paris Agreement which aims to limit global warming to +1.5 degrees Celsius. Hence, the progress of reducing the large contributions of GHG emissions from big tech, could stagnate over Trump’s next term.

Reducing carbon emissions, particularly among the world’s largest companies will be key to help slow the rise in global temperatures. Just 100 companies are responsible for 70% of global emissions, with how they approach this likely to have considerable investment impacts in the years to come. Conversely, shrinking their impact helps protect society from systemic risk and facilitates long term sustainable returns in investment portfolios.
 

The Niche

A fun financial markets fact of the week

Whilst London is colloquially considered the centre of finance, the London Stock Exchange (LSE) does not size up to its American and Asian counterparts. For context, the New York Stock exchange trades over c.£1,300bn worth of shares per month, whilst Shanghai comes in a close second trading over c.£1,030bn. In comparison, the LSE trades a miniscule £130bn.