Donald Trump’s political story is defined by unpredictability. From defying the odds as a outsider claiming the presidency in 2016, to becoming only the second US president ever to win non-consecutive terms in 2024, Trump has a knack for tearing up the script. That’s before we get to his penchant for unfiltered social media posts, personality-driven dealmaking with other world leaders and rapid turnover of advisers.
For investors, this situation creates a quandary. Trying to predict precisely what Trump will do is futile – yet we cannot afford to ignore him either.
Fortunately, there are still things we can do to prepare as the curtain rises on Trump’s second act. Premising positions on specific policy changes under his new administration is foolhardy. But it is still possible to identify broad themes in his agenda – areas where the policies he is considering may work in the same direction.
There are also lessons to be drawn from Trump’s first term, including the issues he emphasised on the campaign trail and the interests of the lawmakers whose support he will need. We aim to reflect these themes through three key tilts in our portfolios. These positions are designed to prepare us for Trump’s return, while respecting the uncertainty around individual policy decisions.
‘America First’, others last?
First, we are favouring US stocks over their peers elsewhere in the world, particularly those in emerging markets. Trump’s ‘America First’ agenda only adds to the risks for markets outside the US, while it arguably contains some silver linings for domestic stocks. There are broader reasons, unconnected to the new president, to think that US stocks are relatively well-positioned in the near term.
Consider the potential impact of the much higher import tariffs Trump is proposing. True, they don’t simply affect foreign firms trying to sell into the US, as ‘tariff man’ Trump sometimes seems to suggest. They’re also a problem for US firms importing inputs.
But experience suggests the risks they pose to both economic growth and to stocks are greatest outside the US. (Part of the explanation is that the sheer size of the US economy means it’s proportionally much less reliant on trade than any other major economy. Protectionism is more appealing if you have a huge internal market.)
China is again the primary focus of Trump’s protectionist ire. He’s talked about a 60% tariff on all Chinese imports, compared with the 10-20% rates he’s considering on the rest of the world. That plan may well be watered down by lobbying or pared back through negotiations. But the direction of travel, and the focus on China, is clear.
The principle of protectionism focused on China, if not Trump’s specific plan, also has bipartisan support in Washington. That, and the experience of the start of the trade war back in 2018, suggests that stocks in China and emerging markets closely tied to it are most vulnerable.
There’s also the idea floated by the Trump campaign of cutting the headline rate of US corporate tax from 21% to 15% (whether across the board or just for certain sectors is not clear). Trump has already been here, cutting the rate from 35% to 21% during his first term in office. If it happened, it would be a tailwind for stocks that pay tax in the US specifically, favouring the US market. If you don’t pay corporate tax in the US, you don’t benefit.
Then there’s the fact that the US market has the wind at its back for other reasons. Analysts have been revising up their expectations for profits in the US by more than in most other markets recently, reflecting both the relative strength of the US economy and its exposure to the structural theme of artificial intelligence. The US also has a particularly high proportion of companies with the ‘quality’ characteristics we typically look for in our investments.
These are factors linked to long-term performance, which tend to indicate a company will be more resilient in the face of volatility. They include strong balance sheets, high and stable profit margins and a track record of efficient investment.
Lastly, it’s worth stressing that the day-to-day political ‘noise’ associated with Trump’s leadership isn’t a good reason to avoid US stocks. They delivered historically strong annualised returns of 14% in his first term, despite endless controversy and even Trump’s own impeachment. Markets have proved good at looking through this noise, and part of our task as investors is to detach ourselves from the politics.
Changing of the guard
Second, within the US stock market, we are tilting away from the tech titans, which have been the biggest winners of the past few years. While these giants should still play an important role in portfolios, the balance of Trump’s agenda adds to the broader case for allocating to smaller firms and suggests sectoral leadership could broaden out.
Take the issue of corporate tax cuts as an example. The greatest beneficiaries are likely to be the companies that pay the highest proportion of their tax in the US. Many large tech (and pharmaceutical) companies would gain little or nothing at all. That’s because they report a substantial share of their profits in lower-tax jurisdictions overseas, such as Ireland. The median tech firm in the S&P 500, for example, already pays an effective tax rate below the 15% level to which Trump is proposing to cut the US headline rate.
When it comes to the tariffs Trump is proposing, China is the largest target. That may be a particular problem for firms with a high proportion of Chinese suppliers. Our analysis of supply-chain data suggests the largest tech hardware and retail firms are particularly exposed, along with the car, chemicals and industrials sectors. In contrast, sectors like banks, real estate, media, insurance and utilities appear relatively insulated.
More generally, Trump’s platform probably creates greater short-term risks to economic growth outside the US than in, which favours firms making a higher proportion of their sales on American soil. Again, within the US market, the largest tech firms score near the bottom on that count. Across sectors, smaller stocks typically make a greater share of their money in the US.
Markets have recently begun to move in this direction. Having blown away the competition in 2023 and the first half of 2024, the so-called Magnificent Seven stocks have collectively underperformed the rest of the US market since July. However, with the valuations of smaller companies still low compared with that of their larger peers, a potential long-term investment opportunity still exists.
Protecting against inflation
Third, we are allocating to inflation-protected US government bonds (known as TIPS) and specifically to those that mature relatively soon. This strategy is designed to guard us against the various inflationary aspects of Trump’s agenda, while also providing a reasonable return. Although inflation in the US is now back below 3%, several elements of what Trump is proposing arguably add to inflationary risks, notably tariffs and reduced immigration.
Short-maturity TIPS are particularly well suited to protect us against higher-than-expected US inflation. By design, their cashflows rise in line with inflation. That’s also true of longer-maturity TIPS, but the experience of 2022 shows that in practice they provide less effective protection against inflation. Their prices are much more sensitive to changes in investor expectations for interest rates, which often also move a lot when inflation is rising.
Many short-dated TIPS also offer real yields (after inflation) of around 2%, in stark contrast to much of the past decade when real yields were routinely negative. Therefore, we’re getting inflation protection and the prospect of a reasonable return to boot.
Oliver Jones is head of asset allocation at Rathbones Investment Management. The views expressed above should not be taken as investment advice.