Having had time to follow the results and market reaction to the last week’s US presidential election, we take a closer look at Donald Trump’s key policies around lower taxes, higher tariffs, deregulation, and tighter borders, and assess what this could all mean for investors on a global scale.
On 5 November, Donald Trump decisively won not only the Electoral College vote but also the popular vote to become the 47th president of the United States. The Republican Party has also taken control of the Senate with a comfortable majority and is projected to win the House of Representatives. President-elect Trump has delivered an impressive win and now has a resounding mandate to deliver on his election promises.
So, what should we expect?
A second Trump presidency is likely to consolidate and build upon the key themes of the first presidency: lower taxes, higher tariffs, deregulation, and tighter immigration controls.
Geopolitically, Trump has been clear about his ambitions; he will seek to leverage the market power of the US economy - as world’s largest consumer market and technology leader - to extract concessions from all its trading partners.
There are strong grounds to believe that President Trump will be more effective in his second term; within the Republican Party there is greater buy-in for his vision for the country and those not aligned with his agenda are no longer in Congress. The Presidential Transition team is also ensuring that candidates being vetted for Cabinet positions will sign up to the full Trump agenda.
Let’s take a closer look at some of the proposed policies in more detail.
Lower taxes
The centrepiece of Trump’s domestic agenda is a lower tax burden on American households and businesses. Trump’s first priority will be to extend individual tax cuts that were passed in the 2017 Tax Cut and Jobs Act (TCJA)[i] that are set to expire at the end of next year.
For businesses, he has promised to lower the corporate tax for domestic producers and to make permanent a 100% bonus depreciation for capital expenditure. The bonus depreciation would also apply to business expenditure on research and experimentation costs. These provisions are aimed at encouraging more domestic investment. For small partnerships, called pass-through entities, he will allow 20% of business income to be deducted from federal income taxes. There have been further tax cuts promised on income from tips, overtime and social security, but those are less likely to be included in any final budget legislation.
Higher tariffs
The second key tenant of Trump’s agenda is a reset of the US’s trading relationship with its global partners. Trump has consistently argued that an unfair global trading system is responsible for the hollowing out the country’s industrial base. He does not subscribe to the classical economics doctrine of mutually beneficial gains from trade. Instead, he views the ever-growing US trade deficit as evidence of unfair trading practices. He believes that the US economy, by virtue of being the dominant market within the global trading system, should extract greater concessions from its trading partners.
Trump’s vision of a fair-trading system is one in which the US reduces it trade deficit to run balanced trade with its trading partners. It is closer to the mercantile policies that prevailed over much of the 16th - 18th century than the post-war movement to dismantle trade barriers.
Last week, Robert Lighthizer, the US Trade Representative under the first Trump presidency wrote in the Financial Times: “Countries that run consistently large surpluses are the protectionists in the global economy. Others, like the US, that run perennial huge trade deficits are the victims. They end up trading their assets and the future income from those assets for current consumption. The problem is not the US savings rate. It is the predatory industrial policies.”[ii]
The Trump team believe that higher tariffs are a key tool to rebalance the trade deficit. They have proposed a tariff of 60% on imports from China to rebalance the bilateral trade deficit. Under Section 232 of the Trade Expansion Act of 1962[iii], the president has the authority to impose such tariffs if excessive foreign imports are found to threaten national security. Tariffs on imports from China could easily be justified under this Act.
In addition, the Trump team are also proposing a 10% - 20% tariff or a reciprocal tariff on all other trading partners. The legal support to do so via Executive Action is less clear cut. The president will need to declare a national emergency under the International Emergency Economic Powers Act (IEEPA) of 1977[iv]. Such a move is likely to be challenged in the courts and face intense lobbying by interest groups.
On balance, we expect that Trump’s universal tariffs will be narrowed to target key sectors (autos, steel) and countries (Mexico, China, Europe, and South Korea) and will accelerate the move away from laissez faire globalisation. How targeted countries respond also is highly uncertain – many countries may choose to hit back with tariffs on key US exports and we could face a tit-for-tat escalation or they could adapt to the new global reality of a more protectionist US and offset some of the tariff impact by depreciating their currencies.
Deregulation
The third key pillar of the Trump agenda is an aggressive deregulatory thrust. He is likely to achieve this through a freeze on new regulations and a roll back of existing ones. The Trump team has proposed moving a substantial number of federal workers onto Schedule F on ‘day one’ of his administration. Such a move would remove their employment protections and allow the administration to slim down regulatory reach by removing capacity. Elon Musk is likely to be tasked with reducing government waste through a newly created ‘Department for Government Efficiency (DOGE)’ that has an ambitious goal of cutting Federal expenditure by $2trn.
Trump believes that cheap energy is a durable competitive advantage for the US economy and would like to reduce the constraints on energy production along with tariffs to rebuild the nation’s industrial base. To this effect, he has promised to cut the funding for the Environmental Protection Agency and unwind clean energy policies. He has committed to withdrawing from the 2015 Paris Climate Agreement and rescind funding for climate initiatives in the Inflation Reduction Act (IRA).
He has also promised to reduce the reach of the Consumer Finance Protection Bureau and has signalled that his nominee to lead the Federal Trade Commission is likely to look more favourably on mergers and acquisitions. Gary Gensler, the head of the Securities and Exchange Commission (SEC) is likely to be resign and be replaced by a more crypto-friendly regulator. He has also proposed to cut the funding for the Internal Revenue Service (IRS) and the Education Department.
Tighter borders
The president’s hawkish immigration stance resonated broadly with voters and appears to have been instrumental in his electoral success. Since winning the election, Donald Trump has strongly re-affirmed his commitment to reducing immigration by increasing funding for Border Patrol, closing the southern border and deploying the National Guard and military to deport millions of undocumented immigrants who have entered the country over the past three years. Such an exercise would be modelled after General Eisenhower’s Operation Wetback in 1954 during which the US deported one million illegal and legal immigrants under the 1798 Alien Enemies Act[v].
While the scale of the deportations is unclear, it is likely that there will be a concerted attempt to remove recent arrivals, particularly the one million immigrants who no longer have a legal basis to stay in the country either because their claims have been rejected or because they have committed crimes. The next administration is also likely re-instate the ‘Remain in Mexico’ policy that was removed by President Biden. Overall, a combination of deportations and substantially tighter border controls are likely to meaningfully reduce immigration into the US and tighten labour markets.
Investment implications
The impact on the US economy will largely hinge on the scale and sequencing of the Trump administration’s measures—tax cuts, deregulation, tariffs, and deportations. Deregulation and streamlining government operations could deliver supply-side efficiencies, boosting productivity. However, a policy of mass deportation could constrain the labour force, reducing potential output.
The extension of the Tax Cuts and Jobs Act (TCJA) may not inject fresh stimulus, yet it could bolster business sentiment by staving off a tax increase that was expected under a Harris administration. Meanwhile, tariffs are likely to lift price levels in the US, with the ultimate inflationary impact depending on the dollar’s response and the potential for retaliatory actions from trading partners.
So, what does this mean for markets? Following last Tuesday’s election, equities have rallied. The S&P 500 rose by 3.7%, global equities by 2.4%, and US small-cap stocks by an impressive 6%. Chinese equities, as anticipated, dipped, though only by 1.3%. Yet the durability of this US-centric rally will likely be determined by the path of US bond yields, which initially spiked but have since returned to around 4.3%, close to election night levels[vi].
If, as we expect, a Trump administration’s second term brings faster and more effective policy implementation, bond markets could face renewed pressure. The administration’s core agenda—tax cuts, tariffs, and tightened immigration—points toward higher government deficits or rising inflation, or both. This combination poses a particular challenge for US bond markets.
In response, we are maintaining a cautious stance on global bonds, remaining underweight, while keeping our overweight position in equities, where higher nominal growth should support earnings.
We retain a sharply underweight position in China-centric equities and favour US-based “national champions,” including some of the prominent tech leaders. We also expect a stronger dollar, particularly against the euro, and continue to hold gold as Brazil, Russia, India, and China (the BRICs) and other emerging economies increase their gold reserves.
In short, this “regime change” in Washington signals higher bond yields, elevated inflation, stronger nominal growth, and a firmer dollar—at least until a multipolar world order more fully emerges.
[i] 2017 Tax Cut and Jobs Act (TCJA)
[ii] https://www.ft.com/content/c72fac7b-4b0c-4981-8bc8-8999bde17900
[iii] https://crsreports.congress.gov/product/pdf/IF/IF10667
[iv] https://sgp.fas.org/crs/natsec/R45618.pdf
[v] https://www.archives.gov/milestone-documents/alien-and-sedition-acts
[vi] Bloomberg, data as at 11/11/2024
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