The outlook for investors if Trump wins US election

Article written by  James Kirby. Published in The Weekend Australian July 20, 2024.

The likelihood Donald Trump will win the next US election has already triggered a new movement on global markets. It’s called the “Trump Trade’’ and it’s set to reshape the outcomes for Australian investment portfolios in the coming months.

There is simply no escaping the dominant influence of US developments on our investments. Wall Street stocks now account for 70 per cent of the world sharemarket index. Momentum in the Australian investment market is a carbon copy of Wall Street – if the US runs up, we will run with it; if it drops we will drop as well.

And the signs are that the US market will get another ‘‘Trump bump’’ just like it did in 2016 if Trump wins again in ­November.

Keep in mind that the last time Trump came to power US stocks rose by more than 60 per cent between his election and the arrival of the Covid pandemic.

From an investor perspective the key point about Trump is not who he is, but what he is: a pro-market Republican.

He is, of course, a one-off version of a Republican leader, but the key factors remain unchanged. He will be pro- business, he will back deregulation and lower taxes.

Each of these factors act as a stimulant to the investment market. They also push rates and inflation higher.

Trump – and his newly minted vice-presidential candidate JD Vance – are also potential isolationists who will break with free market principles in the interests of protecting the US economy.

Higher rates, higher inflation and the decline of free trade around the world are not good for Australia, but these concerns are longer-term.

By the way, Vance is a former venture capital executive and a close associate of Silicon Valley luminary Peter Thiel, the chairman of ‘‘big data’’ stock Palantir Technologies.

One of the big differences between the first Trump presidency and what might become ‘‘Trump 2.0’’ is that when Trump came to power the first time interest rates were at all-time lows. This time around rates are considerably higher.

So we have a potential US leader who is free market, but protectionist. He is pro-US manufacturing but no big fan of the electric car industry. Investors will need to look a lot more closely to pinpoint where the money can be made or lost under a new Trump regime.

The upside

Over the course of 2024 the Trump Trade has already meant better conditions for shares and for gold. That might seem a contradiction, because gold is meant to be a uncorrelated asset which rises when sharemarkets fall.

But what’s happening is that investors are backing Trump to push the sharemarket higher while worrying he may endanger the global economy with inflationary actions, so they also invest in gold.

As one gold report put it this week: ‘‘The rise in gold futures has coincided with the Trump Trade.’’

In reality gold is currently driven by the immediate prospect of a US rate cut, but longer-term, gold is set to become a Trump Hedge.

Just like the last time, Trump will be both bankrolled by and supportive of corporate America, especially oil and financial stocks: The oil and gas sector is a key backer of Trump, while JPMorgan supremo Jamie Dimon has been mentioned by Trump as a potential replacement for Fed chair Jay Powell.

While these are positive signals for mining and bank stocks, it’s the opposite for the ESG (environmental, social and governance) movement which has been struggling partly due to Republican-led challenges to local government ESG initiatives in the US.

In global terms this means we could see a revival of fossil fuel stocks and a lot more ‘‘reappraisals’’ of alternative energy initiatives, such as Fortescue’s reversal of its green hydrogen project this week.

But as always with Trump, generalisations are dangerous. He is no fan of the current support system for electric cars. No wonder Tesla founder Elon Musk is suddenly offering to bankroll him.

Tesla remains the most widely held overseas stock by Australian investors. Yet while the S&P is up 17 per cent year to date, Tesla is unchanged.

Overall, technology stocks have led the world bull market this year and Trump – not to mention Vance – is expected to be broadly supportive of the sector. It’s also worth noting that the wider bullishness on the ASX – which is up 11 per cent this year – is due not just to banks, but also tech-linked stocks such as Goodman and NextDC. While there are endless reports about Trump, the best note aimed at Australian investors comes from Matthew Tan, senior asset allocation specialist at LGT Crestone. Tan says investors they should prepare for five key developments from a new Trump administration.

Here’s an edited version of what Tan is telling private clients to expect:

• Extending the 2017 Trump tax cuts – a move that would bolster household and corporate earnings, but further reduce the long-term sustainability of the US fiscal position.
• Draining the swamp – Trump’s potential efforts to up-end the US bureaucracy will be relevant to investors, particularly the outlook for the Federal Reserve (Fed). Any move to replace the existing board with more ­radical members should worry ­investors.
• Finish the wall – until we see tangible steps to support Trump’s plan to deport tens of millions of illegal immigrants, we should focus on the more feasible outcomes, which probably include increasing border security, suspending various welfare and lottery programs, and introducing a points-based merit system for skilled migrants, similar to Australia’s current structure.
• Tariffs and trade – without congressional support, enacting a 10 per cent across-the-board tariff on international exports would first require Section 232 or Section 301 investigations, both of which should be familiar to investors from Trump’s first term and both of which are lengthy. This would allow time for potential negotiations or side-deals, as occurred in 2017-2021.
• Geopolitical volatility – regardless of who wins, the world is already progressing towards a multipolar state, with more diverse actors on the world stage.

The downside

‘‘Expect the unexpected’’ will need to be the guiding principle for investors under a new Trump regime. He might be pro-business, but earlier this week Trump took a swing at how Taiwan robbed US chipmaking capacity. It turns out Taiwan makes the key components for Nvidia, arguably the most important stock on Wall Street in terms of sentiment. The comments immediately sparked a rush of selling in Nvidia stock.

On a bigger stage Trump may be pro-market but he thinks the US dollar is too high to be useful to the US economy.

Indeed the term ‘‘de-dollarisation’’ in becoming common as market analysts try to work out what might happen to the world’s reserve currency.

The consequences of a weaker US dollar are many, but perhaps the most worrying aspect for Australian investors is the prospect of Trump aggressively pushing up tariffs, leading to a tariff war in tandem with a currency standoff with other countries, such as China.

This is what Oxford Economics calls ‘‘the full-blown Trump scenario’’. If it comes to pass it would be a huge negative for Australia. Our economy would be pushed to the sidelines as the two heavyweights of the global economy slugged it out.

It’s all unclear.

That’s why there is actually no contradiction in loading up on both shares and gold in anticipation of Trump 2.0.

It can’t be easy trying to tell investors what to do if the highly unpredictable Donald Trump wins, but hey, we all have to try.

Here’s what Tan at LGT Crestone concludes in his most recent note:

‘‘We reiterate that in a more uncertain world, we are maintaining a flexible and nimble approach to our tactical asset allocation, and stand ready and willing to shift our positioning in response to the evolving risks and opportunities across financial markets.”