A new president in the White House, along with the policy change this brings, will no doubt create opportunities and threats domestically. However, as the US is also the largest global economy, it is important to consider how the macro-economic effects of such changes will be felt globally.
Matt Hodge, Financial Planning Partner at Buzzacott says understanding these policies and their potential impact is essential when it comes to financial planning and investment strategies.
Tax cuts: What could change?
“A unified Republican government will almost certainly extend the expiring and expired provisions from the Tax Cuts and Jobs Act, as well as pursue further tax cuts.”
“These and other proposals are costed at close to $7.75 trillion and therefore unlikely to be fully realised due to the implications for the deficit. However, we should expect a loosening in fiscal policy via tax cuts, with the scale of this sensitive to the size of Republican majorities in the House and Senate.”
Tariffs: A closer look at potential impacts
“Trump considers tariffs an effective way of rectifying perceived trade imbalances and unfair trading practices, and has said that some of his pledged tax cuts would be paid for using tariff revenue. However, during his first term, tariffs were threatened more as a means of seeking concessions from trade partners.”
“US tariffs on Chinese imports may increase significantly, although perhaps not to the threatened 60% on all trade. A 10-20% global tariff may be used as a negotiation tool, such as on European higher defence spending. In practice, tariff increases may be more product- and country-specific, implemented and removed sporadically.”
Immigration policies: Workforce impacts
“A unified Republican Congress is likely to pass H.R 2 (Secure the Border Act of 2023), previously passed by the House prior but rejected by the Democrat-controlled Senate. This would require employers to verify employees’ legal work status, restrict the asylum process, and fund the extension of the Mexico wall border.”
“The bill is likely to reduce the undocumented workforce and slow new arrivals into the United States. Additionally, Trump may significantly slow the pace of legal immigration.”
“These measures fall short of a mass deportation plan which may be politically or logistically unfeasible. Either way, the migrant workforce is likely to grow more slowly.”
What will this mean for markets?
“There will always be some uncertainty about the economic implications of a new presidency. We might expect higher US nominal GDP growth, primarily through inflation due to potentially looser fiscal policy, increased tariffs, and lower immigration.”
“Interest rates may fall less rapidly, and the Federal Reserve will face difficult decisions. US bond yields are reflect expectations of higher inflation and increased bond issuance, reducing the chances of a more ‘doveish’ Fed. As the US remains the benchmark for global fixed income, the global bond market may also see a slower easing of rates unless currency pressure dictates otherwise.”
“Expansive fiscal policy and deregulation may favour equities over bonds. The major US indexes surged after Trump’s election, highlighting this expectation. However, excessive growth carries the risk of higher interest rates for longer and, alongside a growing deficit and immigration reforms in a full employment economy, may eventually impact potential growth, the economy and stock markets.”
How could this shape UK investments?
“Trump’s plans will benefit some sectors whilst being detrimental to others. Growth, inflation, interest rates, and currency are all intertwined and an improvement in one factor can often be counteracted by another as foreign government policy reacts to optimise their own position.”
“Policies that strengthen the dollar, for example, will benefit UK investors as US investment returns are converted back to pounds. Similarly, multi-national companies with significant earnings in dollars can find themselves in an equally positive position.”
“US markets initially responded positively but have since retreated. Consequently, it might be imprudent to view the US a one-way bet. While the dominance of the US market is significant, a balanced investment portfolio should still include other geographical regions.”
“Holding a well-diversified, global basket of equities and bonds may well continue to be the answer.”
