PATRICE RASSOU: Trump 2.0: prepare to be blindsided

US president-elect Donald Trump defied the pollsters by increasing his support across most demographics to deliver a resounding electoral victory for the Republican party. This continued the trend that put governing parties across all developed markets to the sword in their national elections.

Trump benefited in no small way from the support of Elon Musk, who used his media platform to personally launch a series of tweets about the elections two weeks before the vote. Perversely, Musk’s posts cast doubt on the fairness of the electoral process and were shared nine times more than his other posts about the election. In addition, Trump’s willingness to get on high-profile podcasts made him win the “attention economy”. 

Looking back to the 1940s, it is hard to work out whether US equity markets do better under a Republican or Democrat-led US government. Yet the post-election pop in US markets was one of the largest on record, with small caps leading the charge. The Trump campaign won the support of Middle America by focusing on the economy and promising mass deportations.

With respect to the economy, the promise of lower taxes and deregulation has led to expectations of faster growth in corporate earnings and the economy at large. There was a promise to bring back an era of US exceptionalism; this despite the US already outperforming other Group of Seven (G7) economies for the past three decades in terms of economic output per person.

More controversially, the threat of higher import tariffs by the Trump administration, especially crippling ones on China, is a higher-risk strategy aimed at the reshoring of jobs to the US. Such tactics date back to the 1820s, when Republican president John Quincy Adams attempted to get re-elected by proposing protective tariffs in contrast to the free trade ideals of his opponent. Democrat Andrew Jackson won in 1828. The concern remains that Trump’s proposed measures will be inflationary and push the federal debt from 100% to 115% of GDP.

While the rate of illegal immigration through the US southwest border spiked to five times the rate over the past decade according to US Customs & Border Protection data, the ability and cost to deport over 10-million people will be challenging. One must think back to the detention of child migrants during Trump’s first term, which led to legal challenges and allegations of human rights violations. Also, the reliance on unauthorised migrants in the agricultural, construction and hospitality sectors is likely to lead to labour shortages and a spike in wage costs, reminiscent to what happened to the UK after Brexit. 

Staying with the UK, who can forget the economic turmoil that the unfunded tax cuts for top earners proposed by prime minister Liz Truss and her treasurer, Kwasi Kwarteng, sparked two years ago? A study by David Hope of the London School of Economics (LSE) and Julian Limberg of King’s College London, on the effect of tax cuts for the rich in 18 developed nations over half a century, was the most downloaded paper from the LSE research database and puts to question the benefits of trickle-down economics for the broader population.

While there are expectations that the US statutory tax rate will be reduced from 26% to 21%-23%, it is worth bearing in mind that the effective tax rate for large US corporates is closer to 18%. The effects of the tax reduction are likely to benefit smaller companies and businesses most, already leading to 3% outperformance by smaller companies in the weeks after the election.

As US inflation moderates, the Federal Reserve now has room to cut rates, but the concern is the level of public debt, which is likely to mount as the Republicans implement their pro-growth policies. The US budget deficit is projected to continue rising and inflation is likely to settle in the 3%-4% range in the years to come. This should lead to holders of US government debt demanding an additional risk premium, which is likely to mean higher US long-term yields.

With the US long-term treasury bond yield serving as a benchmark for the borrowing costs around the world, higher US bond yields could also mean that SA will require higher real rates to attract global capital. Of course, the ace up Trump’s sleeve is none other than Musk’s “department of government efficiency”, whose objective is to cut costs and help contain the budget deficit.

SA will have to quickly learn the “Art of the Deal” to remain a relevant trading partner for the US. As we dissected the policy implications of Trump 2.0, one of my senior investment professionals paraphrased former White House director of communications Anthony Scaramucci to remind me that “those who take Trump literally, don’t take him seriously, while those who take Trump seriously don’t take him literally!”

As Trump’s cabinet picks are finalised there is only one certainty: prepare to be blindsided. 

• Rassou is chief investment officer at Ashburton Investments.