The Economic Landscape Ahead: Market Implications of Trump Presidency

A Trump victory may signify heightened inflation and reduced GDP
Majority in Congress crucial - A Republican-controlled congress could increase fiscal deficits on tax cuts, but impact minimal if split government
US Treasury yields will rise; Asian high-yield bonds to outperform investment-grade peers

Donald Trump's victory in the US presidential election may stoke inflation, affect economic growth and strain global trade relations based on his policies, including higher tariffs and lower immigration.

During the election, Trump proposes a 10%-20% tariff on all imports, with some Chinese goods facing rates up to 60%. He aims to implement significantly more restrictive immigration rules, including limiting pathways to work and student visas. Higher tariffs, reduced immigration and lower planning certainty for investments could weigh on GDP. However, how many of these plans Trump can actually implement depends on whether the House also falls into Republican control. If there is a Red Sweep, and Trump is able to govern as he wishes, this could have implications for fiscal deficits and budgetary policy in particular. Without Democrats in his way, Trump can follow through with his plan to reduce the top corporate tax rate to 15-20% from 21%, a move that may substantially increase the budget deficit. Furthermore, additional stimulus may be needed to cushion the growth shock arising from deportations and tariffs. However, if Democrat controls the House, the impact on the fiscal deficit is likely to be less significant .

Higher costs, disrupted supply chain and a tighter labour force could send inflation back on the uptrend and influence the pace of interest rate cuts. Additionally, Trump's preference for an easy-money policy is likely to pressure Federal Reserve Chairman Powell to cut rates quickly, potentially reigniting inflationary pressures and complicating the interest rate trajectory. Trump may also meddle with Fed policy, which could challenge the central bank's independence once again.

The world and trade order may become murkier and reordered as Trump's foreign policy turns more unpredictable. This will significantly increase the risk of miscalculations in the context of great power competition.

In the short term, we expect equities to perform well on expectations that Trump will fulfill his promises, such as extending "Trump tax cuts" from 2017, implementing deregulations, and reducing barriers and approval times for M&A regulations. However, the momentum may falter in the long run due to dwindling economic growth, higher inflation and bond yields, and risk aversion stemming from escalating geopolitical tensions. We would consider selling into post-election strength while buying on dips in sectors such as banks, traditional energy, and tech giants. These industries could benefit from Trump's policies, which include the overhaul of financial regulators and the provision of tax incentives for oil and gas drilling.

US Treasuries will dictate the broader performance of Asian investment-grade dollar bonds, which are more affected by macro risk sentiment, particularly equities. However, we see a Trump win having a negligible impact on USD-denominated Chinese bonds, since most issuers are not exporters and will not be affected by Trump's tariff policies.

A Trump win may be positive for overall risk sentiment. US Treasury yields could face relatively less pressure if it turns out to be a divided government than they would under a clean Red Sweep. High-yield bonds are expected to outperform their investment-grade peers. Additionally, non-USD currencies, especially the Renminbi, may come under pressure.