How Trump’s presidency could shape investment opportunities

With the recent US presidential election resulting in Donald Trump’s victory, the global financial community is carefully considering how potential policy shifts in Washington may impact investment markets. From corporate tax cuts to trade policy, the anticipated changes are poised to shape the economic landscape, presenting both opportunities and challenges for investors. Here, we explore key developments and explain how our investment strategy positions us to support our clients’ financial objectives in this evolving environment.

Key policy and economic implications

1. Corporate tax cuts
The focus of the Trump administration’s economic strategy includes corporate tax cuts, with expectations of a lowered corporate tax rate. For US-focused, domestically oriented companies, this could boost profitability by reducing their tax burden, translating into potential earnings growth and a favourable climate for US equities. For investors, this presents an opportunity to capture growth within the US market, particularly among small-cap stocks that are heavily US focused.

2. Deregulation
Financial deregulation is another anticipated shift, especially in the banking sector. Early signs show a positive market reaction, with financial stocks benefiting from the potential for reduced regulatory costs. A more relaxed regulatory landscape could also extend to other industries, supporting corporate profitability and creating broader options for equity investors.

3. Trade
Trade policies under the Trump administration are expected to be more protectionist, particularly against key trade partners like China. Increases in tariffs and other restrictions may impact consumer prices domestically while offering certain industries, such as manufacturing, some insulation from foreign competition. However, sectors with significant international exposure could face challenges, contributing to potential market volatility, especially in emerging markets and global equities.

4. Fiscal deficits
The anticipated increase in fiscal deficits due to government spending without corresponding revenue growth could drive inflationary pressures, affecting bond yields. Recently, US Treasury yields have risen, with the 10-year yield around 4.4%, impacting fixed-income investments.

How have we prepared clients’ investment portfolios for this?
Our investment philosophy remains rooted in a long-term, diversified approach, and the evolving US policy landscape presents opportunities for client portfolios. We’ve made adjustments throughout the year ensuring your portfolio is positioned to gain from current and emerging market dynamics.

We have increased exposure to US small-cap stocks, recognising the boost these companies may receive from Trump’s pro-growth policies. Since the election, small caps have shown strong performance, increasing approximately 9% in the month to date. By focusing on businesses poised to benefit from a more favourable domestic climate, we’re positioned to capture value for you.

We have also been adjusting our strategies over the course of the year to favour cyclical sectors, particularly banking, an area poised to benefit from a Trump presidency. Lower regulatory costs and a steeper yield curve could support bank profitability, creating opportunities within the financial sector. This proactive move aligns with our focus on extracting value within cyclical stocks and has delivered positive results to date.

Our emphasis on US equities has also been advantageous amid favourable earnings growth. By overweighting this sector, we’ve harnessed gains from recent policy optimism, which has positively impacted stock prices in line with Trump’s proposed economic initiatives.

Over the summer, government bond yields fell in anticipation of aggressive rate cuts from central banks. We expected this to reverse somewhat and opted to reduce exposure to longer-duration bonds, reallocating to shorter-duration high-yield bonds and equities. This move has shielded portfolios from recent losses in fixed-income investments, while allowing us to capture the upside in equities.

Further to the reduction in bond duration, we also reduced our positions in yield-sensitive investment trusts. This adjustment has mitigated the impact of recent price declines and has since presented us with the opportunity to reallocate at a more attractive price point. We remain vigilant in managing these assets to ensure they align with your income objectives.

The bottom line
Trump’s election introduces new policy directions that will likely reshape the US and global economic landscape. Our allocation to US small-cap stocks and cyclical industries has enabled us to take advantage of these changes, while careful management of our fixed-income and investment trust exposure has helped shield your wealth from recent volatility. As markets react, our disciplined, long-term investment approach remains our core strategy to support your financial goals.

For more information, please contact your private banker.