How Canada investors are bracing for Donald Trump 2.0
City investors are bracing for four more years of unpredictability on the global markets as Donald Trump returns to the White House as president.
After banging the drum for punitive trade tariffs and US protectionism in recent months, Trump’s second term is expected to inflict more turmoil on global markets than outgoing president Joe Biden.
However, City fund managers have cautioned against a knee-jerk reaction to Trump’s inauguration and warned investors not to pivot portfolios overnight.
“Historically, markets have shown resilience across political transitions,” said Nina Stanojevic, senior investment specialist at St. James’s Place.
With a three month gap between his election and taking office, markets have had time to adjust expectations and build positions based on how Trump’s return to the White House will affect the global economy.
Despite this, analysts are watching closely as much of Trump’s policies will be revealed over the next 24 hours, with the new president expected to issue a batch of day one executive orders.
“Immigration, energy and trade will be high up the list and, as always, the devil will be in the detail,” said Russ Mould, investment director at AJ Bell.
Trump has had a lot to say on these issues but he also has a reputation of not always following what he’s promised to do to the letter.
Immigration and mass deportations are likely to be the main focus of the new administration, with a rush to achieve results before political enthusiasm begins to fade.
“This won’t really be a primary driver of financial markets at this stage though, although economists tell us that it may have an inflationary impact down the road,” said Patrick O’Donnell, senior investment strategist at Omnis Investments.
“By giving the US some concessions, such as increased defence spending or purchasing more US oil and liquefied natural gas, the EU may be able to avoid the worst-case scenario of an escalating trade war or see only certain sectors affected by tariffs.”
It’s all about tariffs
Trump’s transactional approach suggests to us there may be room for negotiations
Instead, City traders are focused far more on Trump’s plan to implement a broad 20 per cent tariff on all goods into the US, with harsher penalties for Mexico and China.
While the penalties on trade with many countries are likely to be tough, some analysts expect the impact on allies to be limited as the president is slowly reigned in by advisors and new trade deals are struck.
This short-term pain has left certain analysts optimistic on the outlook for European assets, with hopes that the continent will be able to reach more favourable deals with Trump than competitors.
“Trump’s transactional approach suggests to us there may be room for negotiations,” explained Frédérique Carrier, head of investment strategy at RBC Wealth Management.
Analyst consensus for Europe’s growth throughout this year have only fallen from 1.2 per cent to one per cent since Trump’s victory in November, suggesting a relatively small impact from his return.
“The Trump administration aims to industrialise the US, reduce trade and budget deficits, and maintain low inflation, which presents inherent contradictions,” said John Hardy, chief macro strategist at Saxo Bank.
With trade policies expected to lift the price of overseas goods in the US and overseas, inflation may rear its head again as an issue for policymakers, even as the US Federal Reserve attempts to push inflation below its two per cent target.
This means that “fiscal policy is going to come last,” in Trump’s administration, said O’Donnell. While an extension of Trump’s tax cuts from his first term is widely expected, he warned the politics might be more difficult this time.
“The majority in the House of Representatives is much thinner this time round and the members tend to be less disciplined than in the Senate,” he added.
Analysts are especially concerned over the state of the US budget deficit, warning that it continues at its high levels, US bond yields will continue to be elevated, pushing up gilt yields in the UK too.
Overall, investors will continue to find it hard to predict the new president’s movements, as familiar problems of large deficits, inflation risks, and poor global growth continue to plague markets.
“We expect markets to remain volatile, and not just because of social media posts from the oval office,” concluded O’Donnell.