Themes Emerging from the Presidential Transition

With only weeks left before Donald Trump takes office, we thought it would be prudent to analyse the emerging investment themes globally and also see how the president-elect’s proposals of sweeping tariffs will shape the global economic order going forward.

1. Tariffs: A Risky Economic Gambit

The president-elect’s initial policy musings on imposing substantial tariffs—25% on imports from Canada and Mexico, and an additional 10% on Chinese goods—have dominated early discussions of his economic strategy. The three countries collectively account for approximately 42% of US’ goods imports, according to JP Morgan. The tariffs, if enacted, could represent a tax equivalent to $270 billion annually, or 8.5% of US’ total imports, raising global tariff levels to the highest since World War II.

The potential consequences of such a policy are significant. Economists warn of a global stagflationary shock, where rising prices are accompanied with slowing economic growth. Inflation could surge as trade relationships face disruption. However, some analysts argue that these bold proposals are more of an opening gambit for post-inauguration negotiations rather than steadfast policy measures. Trump has sought to rationalise the imposition of these tariffs as a measure to combat drug trafficking and immigration challenges, suggesting that his strategy may involve using tariffs as leverage for broader, more favourable trade deals.

Potential Impact: Investors should monitor how these discussions evolve, especially in sectors reliant on global supply chains such as manufacturing, automotive, and consumer goods. US consumer goods companies could be on the receiving end of higher input cost for products sourced from asia due to tariff increases. 

2. A Mini US Consumer Boom: Election Optimism in Action?

The US presidential election appears to have triggered a burst of consumer spending.  Data from Mastercard, for instance, showed a 13.4% year-on-year increase in online sales during Black Friday, contrasting sharply with a decline in in-store sales, likely further exacerbated by very cold weather across much of the country.

This trend highlights the growing dominance of e-commerce, accelerated further by the pandemic-induced shift in consumers’ shopping habits. While the current surge may reflect short-term optimism or even relief following the election, it also raises questions about whether this consumer enthusiasm is sustainable in light of potential inflationary pressures and still high interest rates.

Looking Ahead: Retail and e-commerce companies may benefit from this surge, but investors should watch out for an eventual slowdown in growth as the intial excitement passes. The mini boom ishowever providing momentum for th equity market which is likely to continue for the moment in the absence of sobering words from the Federal Reserve about the need for slower rate cuts. 

3. Inflation: More of a Headwind?

The bond market has sent mixed signals about inflation. US 10-year Treasury yields have declined to 4.16% from 4.45% in mid-November, suggesting limited concern. However, recent Federal Reserve minutes suggest a more cautious stance on part of the central bank. The Fed indicated that it is in no rush to reduce rates significantly, reflecting concerns about persistent inflation. We suspect that the markets are living in hope that tariff issue is more ofhorse trading by President-elect Trump rather than the relaity of what he might impose. A yield of 4.16% on the US ten year does not look like the right risk adjusted fair value in current circumstances. 

The Fed’s preferred inflation measure, core Personal Consumption Expenditures (PCE), showed a modest increase of 0.3% month-on-month and an annual rise to 2.8% from 2.7%. However, service-sector inflation—a critical component of core inflation—climbed 0.4% month-on-month, the sharpest rise since March, translating to an annualised rate of 3.9%.

Implications for Investors: We woudl urge some caution on long duration US government debt at present.  With inflation remaining a concern, especially in the service sector, sectors like real estate, utilities, and consumer staples may face headwinds. On the other hand, financials could benefit from sustained higher rates.