Columbia Threadneedle: Market commentary following the U.S. Presidential Election result

MACRO:William Davies, Chief Investment Officer, commented:

“President Trump’s victory has surprised some, but markets had already priced in political volatility risk ahead of the US Presidential Election. The dollar has strengthened against other currencies, as would have been expected and we would anticipate that the S&P will benefit from this outcome. Other markets may experience volatility over the coming weeks, but we think that the impact from intended policies such as trade tariffs will be more drawn out through 2025 and beyond.”

U.S. EQUITIES: Andrew Smith, Client Portfolio Manager, US Equities, commented:

“For once the polls were right! Well, nearly. Although some pollsters had US vice-president Kamala Harris a shade ahead in the popular race, with newly elected President Trump marginally in front across the swing states, by about 0.8pts* on the eve of the election. And it was these swing states which have ultimately carried President Trump to victory, notably Pennsylvania, which effectively got him over the line. President Trump is the first president in over a century to reclaim the White House after losing it.”

“What the polls perhaps underestimated was the margin of President Trump’s win, and the likely clean sweep across all three major branches of government: the Presidency, Senate and House of Representatives. Prior to the election, the most likely scenario was for a divided government split between Republican and Democrat control. Although not all the results are in yet, the Republicans are on course to control all three. This will also be tempered with some relief that this is a decisive victory and unlikely to be subject to legal challenges, like we saw in 2000 and 2020. It is also the Republican party’s first win in the popular vote since 2004.”

“This outcome comes with its own degree of volatility and opportunity. There may be some volatility in markets given that the Republican party has a mandate to introduce more sweeping and far-reaching legislation, although it will take time for the details of that to unfold. There may also be opportunities; expect financials to do well in the short-term given President Trump’s deregulatory bias, and the extractive industries, particularly oil and gas, may also benefit from the policy agenda. There might be some tinkering at the margin with the Inflation Reduction Act (IRA), but we do not foresee a wholescale repeal, given the benefit it has already produced in terms of jobs and investment for many Republican states.”

“US small caps could also do well, at least in the immediate aftermath, given that they are perceived to benefit from more protectionist policies, being much more skewed towards the domestic market and local supply chains, less influenced by tariff rhetoric and reality. Indeed, in the month following President Trump’s victory in 2016 (08 November 2016-08 December 2016), small caps (Russell 2000) outperformed large caps (S&P 500) by nearly 11%. That small cap trade did wane through 2017 but it was still a powerful signal to the market of where President Trump’s policies might hit home.”

“We won’t necessarily get such an extreme response this time, partly because President Trump’s win comes as less of a surprise, but at least in the short term, the decisive Republican victory creates a more constructive outlook for small caps.”

“With all this being said, it’s worth noting that the party in power has actually had very little bearing on long-term stock market returns. So as the old adage goes, it’s the time spent invested in the market which really matters and holding equities through the cycle. Presidents come and go but the stock market remains!”

NOTES: * www.realclearpolling.com – top battlegrounds: https://www.realclearpolling.com/elections/president/2024/battleground-states

EUROPEAN EQUITIES: Francis Ellison, Client Portfolio Manager, European Equities, commented:

“As long-term active investors, we need to assess the implications for European companies and markets. When President Trump was elected in 2016, there was an immediate assumption that his policies would be reflationary, but this was not entirely borne out by subsequent developments.”

“What may change in foreign policy is a forceful attempt to resolve the Ukraine conflict and introduce increased cooperation with Russia. That would help Europe as it would be likely to reduce the oil price, where Europe is a major importer. So we would expect European growth to rise and European inflation to fall.”

“Conversely, while Russian tensions subside, those with China may increase – continuing the theme of President Trump from 2016. This is likely to put pressure on any Europeans who trade there; European companies who may also see tariff threats rise with the US. Autos, where we have little exposure, could be affected, offsetting President Trump’s preference for diesel and gas over electric vehicles. Much of this is already discounted in prices.”

“Luxury goods could also be penalised, and a trade battle with China could make this worse as China could threaten this key European sector too. Our exposure here has also reduced, and is much more selective stock by stock, as impacts will vary.”

“Probably the most important theme is how effective U.S. Government can be with the Republicans winning control of the Senate and, at the time of writing, making gains in the House. This makes it more likely that they can push through legislation where previous Presidents could not. Foreign policy will be important as President Trump looks to negotiate pacts to extend and improve US influence.”

EMERGING MARKET EQUITIES:Krishan Selva, Client Portfolio Manager, Emerging Market Equities, commented:

“The impact of a second Donald Trump presidency on emerging market (EM) equities will likely hinge on trade policies, US dollar strength and geopolitical stability. This will create both risks and opportunities for us to navigate.”

Trade policies
“President Trump’s prior administration was known for its aggressive stance on tariffs, especially towards China, and during the current election campaign he continued this rhetoric. Could the threat of tariffs be used to make a deal? After all, President Trump stated he has no issue with Chinese automotive firm, BYD, opening a factory in Michigan given his desire to reindustrialise the US and create blue collar jobs. President Trump also stated his intention to impose additional tariffs on China if China were to "go into Taiwan". What we can conclude is that tariffs will lead to increased costs for emerging market exporters dependent on US demand. On the flip side, other emerging market exporters could benefit from companies relocating supply chains, to areas such as South-east Asia and Latin America.”

US dollar strength

“Historically, a stronger dollar is a headwind for emerging markets. President Trump’s administration may push for tax cuts and spending, which could boost US economic growth, resulting in higher interest rates, and might lead to a stronger dollar. President Trump has also been an advocate of a weaker dollar for trade purposes, but this did not materialise during his first term as President. Currencies tend to offset the impact of tariffs. As such, the currencies of economies targeted by tariffs should weaken against the US dollar and could present opportunities for emerging market economies to trade in competition with the US.”

Geopolitical stability

“President Trump’s first term included tensions with various countries and a cautious approach to multilateral organisations. Renewed tensions could create uncertainty in emerging markets, especially Asia, impacting investor confidence. However, during this campaign President Trump clearly took an anti-war stance.”

“President Trump has also communicated that he is set on ending the Russia-Ukraine conflict, which will likely require China to help with negotiations.

“As active long-term investors, we will await specific policy details to understand their impact on trade, US dollar strength and geopolitical stability.”