After US president Joe Biden withdrew from this year’s presidential race over the weekend and endorsed vice president Kamala Harris as the Democratic nominee, investment managers share their insights on the market impact as well as how a Trump Presidency could hit China, in particular.

After financial markets seemed relatively calm following US president Biden’s announcement that he will not be seeking re-election, attention has now shifted to what might happen if Donald Trump comes into power, and notably the inflationary impact of his planned policy to step up protectionism.

The central plank of Trump’s economic agenda is protectionism. As president, he cited national security concerns to raise tariffs under so-called Section 232 powers. Beijing was the most common target, with the average tariff levied on imports from China climbing from 3 per cent to nearly 20 per cent during his term. If re-elected, Trump has proposed to hike this to 60 per cent as well as phase out all imports of essential goods from China. In addition to this, imports from the rest of the world would be subjected to a 10 per cent baseline tariff.

Wealth managers are trying to make sense of what Trump might do, and the impact that his policiies might have on clients' investment portfolios. 

If implemented, these proposals would present an inflationary shock. However, Schroders senior US economist George Brown suspects that Trump does not intend to follow through with these measures completely but rather use them in a targeted manner in order to extract trade concessions.

Brown, writing in a note, pinpointed three factors that would help to blunt the inflationary impact of tariffs. Firstly, the dollar would likely appreciate, especially against the renminbi, as Beijing would probably pursue a devaluation. Secondly, the widening in corporate profit margins since the pandemic should serve to absorb higher import costs. Thirdly, goods might be routed via countries that are on more favourable trade terms with the US, as China appears to have done since the start of the trade war.

Economists are seeking to understand what sectors will lose or win from a Trump victory. Biden has also pushed the US in a more protectionist path, imposing tariffs on Chinese exports of electric vehicles, for example. To some extent, protectionism has become a bi-partisan issue – reflecting what some might see as a rowback from the globalisation of trade following the end of the Soviet Union and demise of Maoist China in the 1970s. (See this article about how markets reacted on Monday morning to Biden's departure from the election.)

Immigration
An immigration clampdown could also be more disruptive this time than it was during Trump’s previous stint in the White House. Job growth in recent years has been almost entirely driven by foreign-born workers. “Lower immigration is therefore likely to exacerbate worker scarcity, particularly in sectors heavily reliant on foreign labour such as agriculture and construction. This could then lead to a resurgence in wage growth that further stokes inflationary pressures,” Brown said.

In isolation, higher inflation and lower job creation would act as a headwind to the economy. But Brown expects that this will be more than offset by various growth promoting policies. Of these, the biggest will be Trump’s promise to extend the provisions from his 2017 Tax Cuts and Jobs Act (TCJA) which are due to expire next year.

Growth should also be supported by Trump’s deregulatory agenda. One of the biggest beneficiaries would be the energy sector. Trump has pledged to end delays in federal drilling permits and leases, remove limits on natural gas exports and roll back car emissions rules set to come into force in 2032.

If Trump were to win the election, which there appears to be broad consensus on, Brown expects that US growth would be stronger and inflation firmer. However, the Trump campaign has been light on detail, so it is difficult to make assumptions about economic policy. One thing that Brown is confident about is that most of the macroeconomic impact won’t be felt until 2026 onwards. Not only due to the time it will take to legislate and implement his agenda, but also because of the lags associated with the policy transmission mechanism eventually feeding through to activity and prices. In terms of growth, Brown believes that the US economy would expand by 2.2 per cent in 2025 under a second Trump presidency. It would then accelerate to 2.7 per cent in 2026 as the administration’s growth promoting policies kick in, before easing back to 2.3 per cent in 2027 as higher inflation weighs on consumer spending.

The UBS and other views
Meanwhile, if there were a Trump win, Mark Haefele, chief investment officer at UBS Global Wealth Management, believes that the Chinese consumer electronics sector – including key companies along the Apple supply chain – would likely be most affected, since 20 to 30 per cent of production ends up in the US. Other segments such as mega-cap Chinese internet stocks, along with the Chinese renminbi and currencies sensitive to the yuan and US rates, could see elevated volatility. Ultra-long duration bonds could also be vulnerable to heightened US fiscal deficit concerns, he said.

Anna Rosenberg, head of geopolitics at the Amundi Institute, highlighted that the US election outcome remains uncertain for markets. “A Trump 2.0 administration will need to decide if its goal is to use tariffs to rein in China, and whether it will accept the inflation impact this will bring, or whether lowering inflation is the priority,” she said.

Saira Malik, head of Nuveen equities and fixed income also expects increased near-term volatility with this heightened political uncertainty. “One thing does seem certain: more twists and turns in the political roller coaster in the months ahead,” she said.

UBS's Haefele thinks a three-pronged framework could help investors election-proof portfolio positions while taking advantage of broader tailwinds, no matter who the next US president is. He recommends managing exposure to individual companies, sectors, markets and assets sensitive to the election outcome, as well as tactically playing defence and diversifying across evergreen themes. “As we enter the final months of the current Biden administration, investors should be sure to prepare for the first hundred days of the next presidency. We think well-positioned portfolios should be able to absorb election risks while positioning for broader tailwinds,” Haefele said.