Beyond the Ballot: The far-reaching impact of Trump's decisive win

Published Date: 11/08/2024
Source: By David Crosoer, Chief Investment Officer PPS Investments

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In an election that broke decisively for Republicans, and possibly will break the existing global political order, Donald Trump not only won comfortably in the Electoral College, but also won the popular vote (something no Republican has done since 2004); while at the same time his party flipped the Senate and looks to have held the House too.

Regardless of one’s political persuasion, and one only needs to scan the comments in online newspapers in South Africa to see how divisive the election was, with many of his detractors aghast that his cruel campaign had resonated with so many Americans, and his supporters gleefully applauding what they saw as a decisive rejection of a ‘woke’ agenda that needed pushback, financial markets opened positively the next morning.

So, in an election that polls suggested was too close to call, and where the challenger in the final weeks of his campaign (at least for those of us observing from a distance) appeared to be doing everything in his power to self-destruct; ended up having Trump winning so decisively that the result was largely know before most of us had woken up.

Setting aside (as best one can) one’s own personal views on the matter, markets have clearly been reassured given that the election will not be contested as the win was so emphatic, while Trump’s expected agenda of further deregulation and corporate tax cuts has buoyed US equities (with some notable exceptions), and should be positive for US corporate profits, and deal making.

But with emotions so high is it too easy to overstate the magnitude of a Trump victory? After all, most incumbent governments (including our own, but also United Kingdom, France, Japan, India and most recently our neighbours Botswana and Mozambique) all lost significant support in a year where no matter the idiosyncrasies all electorates punished the ruling parties for the rising cost of living all countries faced post-COVID. Was the United States any different?

Trumps disruptive agenda

Trump ran on a vengeful campaign that will severely disrupt both the US and global economy if implemented. Trump himself has stated he will go after US institutions and his enemies, knowing full well that the US Supreme Court has given him virtual immunity for anything he does as President. And his intention to impose tariffs on all imports into the United States, deport millions of illegal immigrants, and undermine global institutions, is clearly disruptive and likely to be both inflationary and curtail global economic growth.

 

But will Trump follow through on all his rhetoric? The clean sweep of the Republicans across all three spheres of government is not our preferred outcome, as it removes most checks on Trump’s political power and increases the range of possible outcomes. While we also do not yet know who will serve in the new Trump administration (and he might make appointments that will reassure the market) one notable concern is how many of his previous advisors have cautioned against his fitness to hold office and how ineffective they all were at curbing his worse instincts. If Trump were an asset manager, he would not pass our due diligence.

It is noticeable that Treasury yields have ratcheted up somewhat on inflationary concerns as markets fret about the impact Trump’s proposed tariffs could have on inflation and the direction of US interest rates, but whether Trump’s second term will be profoundly chaotic and disruptive to both to the US economy and the broader global economy is hard to read but should arguably be expected.

From a South Africa’s perspective, a more isolationist and transactional United States will be more difficult for us to navigate diplomatically, while Trump’s intention to impose significant tariffs on all imports into the United States will hurt as us economically as well as provide a significant negative shock to global growth, especially the European Union and other trading blocs hike tariffs in response.

At this (early) stage it seems probable that at the very least a Trump presidency will be inflationary and make it less likely that the US Federal Reserve will be able to cut interest rates as assertively as previously expected. It also seems probable that a Trump presidency will undermine US and global institutions, but how decisively is hard to know.

What does this mean for investors?

In our portfolios we have been incrementally increasing global bonds relative to global cash over the past few months; this trade now looks less enticing as cash rates could stay higher for longer, and bond yields may rise further.

We have also been increasing SA equities relative to foreign equities over the past year, but again the possibility of tit-for-tat tariffs is not positive for emerging markets and global economic growth. While we think a global recession is more likely under Trump, his obsession with the US stock market might make it prudent not to underweight it too significantly, given this might be the ultimate metric that holds him to account.

The reality is that even if Trump would fail our due diligence process, he effectively is in all our portfolios for the next four years, whether we want him in there or not. Here assuming on the margin that Trump might be positive for the US, and less positive for the rest of us, might be more effective than seeing obvious parallels to the 1930s and attempting to hold an extremely defensive portfolio that tries to mitigate an extremely negative tail risk. 

 

Investing is never without its challenges. Our US appointed asset managers are well-placed to navigate the potential opportunities a Trump Presidency will offer, while our overall portfolio construction will try to sensibly navigate an uncertain world that is sure to continue to surprise. 

We remind investors that in times of volatility and uncertainty the best investment opportunities often materialize, and as a multi-manager we are especially focused on appointing active asset managers best placed to exploit these on our behalf.