After all that, it was remarkably straight forward. It was close but decisive enough. Donald Trump won an unambiguous victory in the White House race: no re-run of 2016 and any question of losing the popular vote but winning the Electoral College as happened against Hilary Clinton, and no fear of a repeat of 2020 and recriminations of cheating amid sensitive state contests that were on a razor wire. The Republicans are across the line in the Senate too. Only the House of Representatives remains, at the time of writing with 51 seats of the 435 still to be counted and needing 218 for a majority, the Republicans have 203 in the bag against the Democrats’ 181. That race is not yet over but the Democrats need 37 of those remaining seats to win (so far, of the 384 seats counted and reported, the Republicans have gained three, the Democrats have lost three).

 

Whether or not with a clean sweep of the White House, the Senate and the House, Trump has a firm mandate. From an investment perspective, what might it mean?

US Economy

Apart from immigration, one of the defining factors of this election has been ‘inflation’. On the face of it, headline inflation itself is no longer the problem, not now that the reported official rate of CPI is 2.4%, just above the Federal Reserve’s mandated target, and way below its painful peak of 9.1% in June 2022. What it is about, however, is the cost of living: over the course of two years, that relentless upward pressure on prices, even at a slowing pace, has left goods and services far less affordable. Household budgets are squeezed. On the basis that the nominal price of goods and services seldom falls unless being discounted through promotions (which usually happens only in periods of oversupply or weakness in consumer demand, neither of which is much in evidence in the US economy today), the remedy for voter dissatisfaction is a rise in real wages. Real wage rises are by definition inflationary and can only be sustained by an economy that is growing at an above average rate.

 

Energy features large in Trump’s economic strategy. The US is almost 100% self-sufficient in oil (it exports some grades in which it has a surplus of supply over domestic consumption, while grades it does not have in sufficient quantities have to be imported). Trump has said that he’s ‘gonna drill, baby, drill’. Gasoline (petrol), diesel and heating oil are fundamental to most American households and businesses: keeping the price of fuel down is perceived as the equivalent of a tax cut but more importantly, helps moderate inflation.

 

Trump has also made it clear that a central economic plank of MAKE AMERICA GREAT AGAIN (MAGA) is a new round of trade tariffs. 2018 saw him stick targeted tariffs on countries he considered to be violating America’s goodwill, particularly those with a big trade surplus with the US (which he cast as undermining US industry and jobs) and/or where the US was also paying for their defence, or where in his estimation they were ‘stealing’ America’s intellectual property. Germany, Japan, Mexico and China were all firmly in the crosshairs (however much Democrats protested, Biden chose to leave every one of those tariffs in place, as are the ones returned with interest particularly by China).

 

This time the proposal is a crude across-the-board 10% import tariff, with a 60% rate levied against China. The strategy is nakedly protectionist and in the case of China, punitive. What would be rational would be to take a leaf out of Joe Biden’s Inflation Reduction Act (IRA) and add enticements to foreign companies to invest in America, stamp their goods “MADE IN THE USA” and allow them to sell at competitive prices in the domestic market and create American jobs. Time will tell whether Trump’s strategy is an iron fist in a velvet glove, or merely a mallet with which to beat America’s economic adversaries. Even if the strategy is uniformly applied (with that exception of the surcharge on China), the inflationary effect will be uneven. Foreign goods which can be substituted by domestically manufactured ones (e.g. commodity chemicals etc) will have little or no inflationary effect unless supply is constrained. However, items such as proprietary branded goods of distinct origin (e.g. luxury items such as Scotch whisky, Champagne etc) which cannot be substituted are most likely to be impacted.

 

With Trump’s plans to want to see the US economy accelerate and grow at 3% pa over the tenure of his presidency, investing heavily and reducing tax rates, markets are assessing three interlinked risks:  the extent to which a surge in the money supply through loosening fiscal policy, allied with those tariffs, creates upward pressure on inflation (it is being referred to in the markets as the ‘Trump reflation trade’ and potentially means interest rates fall less far than previously anticipated); second, with investment up and taxes down, what the risk is that growth fails to dent the deficit and US government debt remains stubbornly high.

The Global Economy

Tariffs, subsidies and trade barriers are designed in their various ways to change behaviour, to engineer a response whether economic or political. In that respect it would be amazing if there were no effect from Trump’s actions.

 

Joe Biden’s IRA was laden with green subsidies. His was an inducement to offer tax breaks to businesses and subsidies to the public to convert from a fossil-fuel society to one powered by alternatives with any product they liked (cars, heat pumps, insulation etc) strictly on the condition the goods were manufactured in the US. It changed world trade flows. The question is whether Donald Trump’s use of blanket tariffs will have the same effect. He is actively putting a barrier in place but against everyone; how will the rest of the world respond? Will they apply like-for-like measures? The goods affected still must find a route to market at competitive prices, notably those from China (will Trump’s battleground be electric vehicles and solar panels?). Trump’s actions are neither novel nor unilateral. In the case of EVs, effective from the end of October the EU has already instigated a new 35% tariff on top of the existing 10% surcharge on all Chinese EVs imported into the Union.   

Foreign Policy

When he puts his mind to it, Trump can charm. But he is no diplomat: he can be brutally caustic and he has a vindictive streak to those he regards as disrespecting him. He regards international relationships through the lens of the US businessman that he is: other world leaders are not partners, they are counterparties. This is no semantic difference but an entirely different state of mind: you work together with a partner in mutual interest; you trade with a counterparty with the aim of always coming away with more than you have conceded. He is an unapologetic nationalist (MAGA!). Whether he himself is an isolationist is a moot point (he knows where ‘abroad’ is and who ‘foreigners’ are) though there is no doubt that many Republicans in Congress have little if any interest in what happens beyond America’s shores and see it as no concern of theirs.

 

While many capitals will be recoiling in horror at the prospect of another four years of ‘The Donald’ and his wrecking ball at work from the White House, as against 2016 at least now he is a known quantity, though of the main western leaders, only Emmanuel Macron remains in office from Trump’s previous term. National muscle memory might be there but the personal relationships are not.

 

The immediate risk is to Ukraine. Will Trump do what he has so far indicated: turn off the funding taps and the military aid to Kiev, and proceed to bring the conflict to a close through a negotiation with Putin (with Zelensky presumably being kept out as irrelevant)? Such a unilateral funding change while the war is proceeding would drive a canyon-wide division through NATO. The Alliance’s European members would find themselves in a cleft stick of how to fill the void and of preventing what will undoubtedly be presented as a Russian victory right on their doorstep. After his ‘they (the Russians) can invade who the hell they want’ outburst a few months ago, the key is the immediate future of Trump’s relationship with NATO. He hates delinquents who do not pay their way; on the other hand he knows America needs allies even in its own interests. The majority of NATO members are now meeting the 2% of GDP spending requirement; the pressure now is that Trump believes every member should be paying at least 3% of their GDP towards defence. Mark Rutte, the former Dutch Prime Minister and newly installed as Secretary General of NATO, has a crucial role; he is regarded as being one of the few whom Trump respects; his arts of persuasion are about to be sorely tried.

 

It is how this is read in Moscow, Beijing, Tehran and Pyongyang and by other parties including non-state players intent on doing harm to the West. Obeying the laws of geopolitical physics, every action has a reaction however long it might be before the reaction is evident.

Risk Perspective

A couple of weeks ago in these columns, we analysed risk as seen through bond yields. Taking everything above into account, markets have assessed an increasing risk the further out we look. Over the past month, the US 10-Year government bond¹ yield² has risen from 4.0% to 4.45%; further out at 30 years, the yield has jumped from 4.28% to 4.64% (it was 3.93% on September 14th and is now back to where it was in July, two months before the Federal Reserve began cutting interest rates). As a reminder, bond yields move in the opposite direction to prices.

 

The US is not alone: as investors take stock of not only what is happening in the US, they also continue to digest the full ramifications of Rachel Reeves’s budget with rising scepticism. The UK 10 Year Gilt (government bond) yield was 3.76% in mid-September; today it is 4.56%, an increase of 80 basis points (0.8 of a percentage point); the 30-Year Gilt has broken a major barrier and at 5.05% is the highest since 2002 (it briefly exceeded it after the Hamas attack last year, but is 30 basis points higher than on October 2022 at the peak of the Truss/Kwarteng hysteria).

 

Government bond yields have been volatile. Where the Jupiter Merlin portfolios own fixed income funds, over the past few months we have been deliberately reducing the macro exposure, switching from strategic bonds to corporate bonds³ and high yield4 which are respectively removed further and further from the direct effect of interest rates and more towards the idiosyncrasies and financial risks of individual companies. Those types of bonds tend to be of shorter duration (i.e. on issue they typically have shorter maturity dates than government bonds); they come with different risks but the sensitivity to interest rates is much reduced.

 

The Jupiter Merlin Portfolios are long-term investments; they are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each. With liquidity uppermost in our mind, we seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions.

1Government bonds are issued by governments.  Bonds are a type of fixed interest investment, in which a company, government or other institution borrows money and, in most cases, pays a fixed level of interest until the date when the loan is due to be repaid.

 

2The rate of interest or income on an investment, usually expressed as a percentage.

 

3A corporate bond is a bond issued by a company.

 

4High yield bonds are bonds issued by companies that are deemed by credit rating agencies to be relatively less likely to meet their payment obligations to bond holders than ‘investment grade’ bonds. Bonds issued by such companies have a higher yield (income paid to bondholders) to compensate for this higher risk.

Authors

The value of active minds – independent thinking

A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.

Fund specific risks

The NURS Key Investor Information Document, Supplementary Information Document and Scheme Particulars are available from Jupiter on request. The Jupiter Merlin Conservative Portfolio can invest more than 35% of its value in securities issued or guaranteed by an EEA state. The Jupiter Merlin Income, Jupiter Merlin Balanced and Jupiter Merlin Conservative Portfolios’ expenses are charged to capital, which can reduce the potential for capital growth.

Important information

This document is for informational purposes only and is not investment advice. We recommend you discuss any investment decisions with a financial adviser, particularly if you are unsure whether an investment is suitable. Jupiter is unable to provide investment advice. Past performance is no guide to the future. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested.  The views expressed are those of the authors at the time of writing are not necessarily those of Jupiter as a whole and may be subject to change.  This is particularly true during periods of rapidly changing market circumstances. For definitions please see the glossary at jupiteram.com. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given. Company examples are for illustrative purposes only and not a recommendation to buy or sell. Jupiter Unit Trust Managers Limited (JUTM) and Jupiter Asset Management Limited (JAM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ are authorised and regulated by the Financial Conduct Authority. No part of this document may be reproduced in any manner without the prior permission of JUTM or JAM.