Calvin Coolidge, the 30th president of the United States, once said, "the business of America is business," and this holds true for elections. After a costly battle, Donald J. Trump has been elected as the 47th President of the United States.
The electorate faced a clear choice: Trump's protectionism with broad tariffs, targeted tax cuts, and deregulation versus Kamala Harris' tax increases and regulatory expansion.
The election result gives the incoming US government a clear mandate to potentially implement tariffs reminiscent of those imposed by the Smoot-Hawley Tariff Act under President Hoover in 1930. While there is hope that the campaign rhetoric was mostly a negotiating tactic for future trade deals, no one can claim they weren't warned.
These measures would significantly impact large export economies, particularly China, Mexico, and the EU, with Germany in particular feeling the acute effects. These challenges arise at an especially difficult time for China and Germany, as both face domestic structural economic issues. For Asia, a stronger dollar and a potentially shallower Federal Reserve rate cutting path will reduce the tailwinds for the region
Higher yields may moderate policy decisions
Neither party in the contest offered free-market policies or fiscal conservatism. Trump is pro-business but arguably not pro-markets, except for his bid to deregulate. Both parties have learned that US exceptionalism extends to fiscal policy, as the role of the US dollar as the world's reserve currency makes it unlikely that US Treasuries will ever sell off to the same extent as in the UK, Southern Europe or in emerging markets. However, this doesn't mean the US won't face higher yields, which could potentially constrain policy priorities. Higher yields may also moderate some of Trump's impulses, given their impact on the equity market which likely remains a self-chosen barometer for his success and popularity.
The new president's advisors believe that one key mistake of the Biden administration was injecting liquidity through programmes like the Inflation Reduction Act, while stifling activity with regulations. That said, US companies may now face a similar push-pull: corporates will benefit from a business-friendly regulatory regime, but import-exposed industries may suffer from tariffs. For investors, this environment will likely lead to divergent sector and company performance, making security selection crucial.
A delicate tariff/regulation balance
Trump's re-election may herald a further lowering of corporate tax rates from 21% to 15% for domestic manufacturers. This could significantly benefit smaller companies by reducing their tax burden, promoting domestic investment and job creation. However, renewed inflationary pressures might limit the Federal Reserve's ability to cut rates, impacting small-cap firms reliant on floating-rate debt. The central focus on tariffs creates uncertainty, particularly for sectors heavily dependent on imports.
The sector impact may affect Financial equities, which generally benefit from higher rates and lighter regulation, Consumer Discretionary stocks, which face tariff and labour-cost challenges, and energy companies -- with gains in Oil & Gas but potential setbacks for Renewable Energy.
Antitrust easing to spur M&A activity
Although Trump is not necessarily a traditional free-market Republican, any pullback from the previous administration's antitrust regime is expected to create a much more favorable backdrop for dealmaking.
The areas of focus will include vertical deals, which have been a major theme of the Federal Trade Commission and Department of Justice’s scrutiny over the past four years, as well as the Healthcare and Technology sectors. Private equity activity was also significantly lagging in 2024, but is likely to rebound, given the trillions in available funds.
Modest impact on credit markets
At the time of writing, the Presidency and Senate have shifted to Republican control, while the House is still up for grabs, suggesting potential for divided government. The unified Republican executive and Senate might increase fiscal pressures. Lower taxes are unlikely to be offset by spending cuts, leading to higher deficits and interest rates.
In corporate credit markets, Energy, Financials, and parts of the Healthcare sector could benefit from a business-friendly regulatory regime, while import-exposed industries may suffer if Trump imposes tariffs. A higher rate environment should also boost the appeal of floating-rate loans, collateralized loan obligations, and direct lending strategies.
Despite these dynamics, we expect the immediate impact on credit markets to be modest, with the Fed's rate-cutting trajectory and key market trends, like private credit growth, continuing steadily. With potential divided control, some concerns about ballooning deficits ease, shifting attention to what Trump can achieve in trade policy without full congressional cooperation.
Checks and balances
In true American spirit, we offer a note of optimism (especially to our European readers). Regardless of the election outcome, we never believed it would destroy US democracy or the economy. The nation's checks and balances are robust, and its economic foundations are strong.
All data Bloomberg unless otherwise stated.
With contributions from Jens Foehrenbach, Head of Public Markets, Discretionary, Man Group and Man Group portfolio managers Michael Zhu, Alex Robarts, Mike Corcell and Bob Gallagher.
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