Trump trade: What investors need to consider in the long term

Investors won’t have long to wait to see whether Donald Trump is going to keep all his promises as the 47th US President. If he does, it’s likely that his policies will lead to a major reshape of the economic and political landscape. 

On election day itself, major US stock markets, the dollar and crypto gave an enthusiastic reaction, surfing on a huge wave of hope and optimism that Trump is going to follow an expansionary policy and supercharge US economic growth.

“There is a lot to consider under the return of a Trump administration and what’s worked for investors immediately after the election may not remain that way over the longer term,” warns Dan Coatsworth, investment analyst at AJ Bell.

What does Trump have up his sleeve for the economy?

The President-elect had two key measures on his agenda throughout his campaign, cutting corporation tax from 21% to 15% for companies that produce in the US and imposing new trade tariffs on imports. 

Lowering taxes is music to the ears of business leaders, as it means more money is left to reinvest or use “to buy back shares or to pay out dividends,” says Coatsworth adding that “a boost to post-tax earnings would in theory feed through to a higher share price. Greater confidence among corporates could see them invest more money to support their growth and that could feed into the economy.”

However, raising trade tariffs could fire up inflation, which has plummeted since peaking at 9.1% in 2022 and is nearly back to the Fed’s 2% target.

However, Trump vowed that if voters returned him to the White House, “inflation will vanish completely.” But despite the optimism, many remain concerned, including sixteen Nobel Prize-winning economists who signed a letter in June expressing fear that Trump’s proposals would “reignite” inflation.

“Imposing big tariffs on imported goods (Trump has proposed 60% tariffs on goods from China, and up to 20% on the rest of the world) would significantly push up prices as the extra costs are passed onto the customer,” says Coatsworth. That could result in lower demand, hurting businesses. 

Another promise from Trump, a clamp-down on immigration, could lead to higher wage bills, as many American companies face a shrinking pool of workers happy to accept low-paid jobs. 

Is the tide turning for key interest rates?

Uncertainty about inflation could also change the Fed’s approach to cutting rates, potentially leaving key interest rates higher for longer.

“While we could still see rate cuts in the near term, the Federal Reserve may not cut as hard and fast as previously thought if inflation strengthens once Trump gets back into power,” says Coatsworth. He added that this scenario is “the opposite of what equity markets have been pricing in,” meaning that the tide could turn on the US stock markets should there be any sign that the Fed is changing course. 

As for Europe, protectionist policies such as a trade tariff from the US could push the ECB to cut rates faster than expected to boost economic growth. 

Further impact of trade tariffs

“Tariffs present another problem, particularly for investors holding Chinese shares or funds,” says Coatsworth. A lot of Chinese companies have made big money from selling goods into the US and now they face the prospect of smaller margins due to potential tariffs. Europe could also be a loser from US tariffs.

“Markets do not like trade wars and an escalation of tensions between the US and China or the EU could cause volatility among asset prices,” warns Coatsworth.

What sectors could benefit from Trump’s policies?

According to a new report by Goldman Sachs, Trump’s re-election will likely entail renewed defence spending in Europe, costing the EU an estimated 0.5% of GDP each year. 

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Defence stocks on the other side of the Atlantic could see more inflows too, as “Trump increased defence spending in his first term as president and would likely do the same again this time round,” according to the investment analyst at AJ Bell. Shares of BAE Systems, Northrop Grumman and Booz Allen Hamilton have already ‘celebrated’ following Trump’s election victory. 

Trump’s pro-oil business approach and his promises about increased drilling on federal land and awarding more permits for LNG exports have already fuelled trade in Chevron and ExxonMobil shares. This, coupled with the prospect of looser regulation could give a real boost to oil stocks. 

However, there is an expected decline in ESG (Environmental, Social, Governance) investments, writes Nikos Avlonas, President of the Centre for Sustainability and Excellence (CSE). In his article ‘How Trump’s Election Could Shape Sustainability Policies and Investments in the US and Europe’, he predicts growth in traditional energy sectors due to Trump’s rollback of environmental regulations.

Banks could be the absolute winners of the next four years

From the higher interest rates to the supercharged economy, Trump’s promises seem to benefit banks across the board. 

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Looser regulation could replace the tighter controls of the Biden administration, with its requests for extra capital requirements from the largest banks to cushion them against potential losses. 

This, coupled with more economic activity, higher interest rates and more business investment will be beneficial to the banking sector. 

“When you factor in the potential for looser regulations, lower corporate taxes potentially leading to higher business investment, and the prospect of interest rates staying higher for longer which is good for lenders, it’s easy to see why the outlook for the banking sector is more encouraging under Trump,” says Coatsworth, adding that Citigroup could be one bank to watch as “it has interests in retail, commercial and investment banking, potentially making it well placed to benefit from any uplift in activity.”

Another potential bet goes to Bitcoin, the crypto currency which has risen to record highs on Election Day. It could also benefit in the long term from Trump’s promise to make America ‘the crypto capital of the planet’, as well as the prospect of loosening regulation on digital assets which could further fuel interest in this asset. 

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Disclaimer: This information does not constitute financial advice, always do your own research on top to ensure it’s right for your specific circumstances. Also remember, we are a journalistic website and aim to provide the best guides, tips and advice from experts. If you rely on the information on this page, then you do so entirely at your own risk.