‘Trump trade’ is here

WITH the US presidential election less than two weeks away, how are the capital markets reacting?

It appears that the markets have begun to price in the so-called “Trump trade”, as the campaign of US Republican nominee and former President Donald Trump continues to gain momentum.

The “Trump trade”, in anticipation of a return to Trump’s presidency, is associated with policies of lower taxes, deregulation and increased infrastructure spending, all of which are generally positive for US equities and the US dollar.

However, this may not be the case for non-US equities and currencies.

In Standard Chartered Bank’s (StanChart) recent Money Insights podcast, called “Through the Noise”, the group’s investment strategists point out that while the election is still too close to call, a Trump win would likely lead to US equity outperformance and a positive impact on the US dollar and gold.

Conversely, a victory for Democrat Kamala Harris, along with a divided Congress, would mean business as usual in the United States, alleviating geo- political uncertainty and lifting non-US equities and currencies, according to StanChart strategists.

As it stands, the momentum seems to be on Trump’s side.

“The US Republicans seem to have gained momentum heading into the Nov 5 presidential election.

“While a lot could change in the coming weeks, betting markets are indicating a widening gap in Trump’s chances of winning the White House, although average poll of polls by Real Clear Politics still show a tight race,” StanChart notes.

“Whichever party wins the White House is also likely to win control of the US House of Representatives, given similar voting constituents.

“Also, Republicans have a greater chance of taking back control of the US Senate, according to the polls,” it adds.

These indicators imply rising chance of a Republican “clean sweep” of the White House and both houses of the US Congress, StanChart states.

Touching on the Trump trade, it says, while a Republican “clean sweep” is probably the most supportive scenario for US risk assets and the US dollar, given Trump’s agenda involving tax cuts, deregulation and import tariffs, such an outcome would likely be negative for non-US equities and US bonds.

This is due to the tariffs on China as well as US allies, and inflationary impact of immigration curbs and higher budget deficits.

“Some of the ways to position for a Republican ‘clean sweep’ would be to buy the US dollar and stay ‘overweight’ US equities, with preference for the following sectors: small caps (benefitting from tariff protection), financials (potentially higher-for-longer interest rates and deregulation), energy (Trump’s preference for fossil fuel) and aerospace and defence,” StanChart recommends.

Meanwhile, UBS Group stresses that election uncertainty is no reason to exit the market.

“We expect volatility to pick up in the coming weeks amid elevated uncertainty.

“But we also think the potential volatility is unlikely to derail positive equity fundamentals, and remind investors not to make dramatic portfolio changes based on expected election outcomes,” the investment bank states in its latest Insights report.

It argues that the US presidential election is taking place against a backdrop of healthy earnings growth and solid economic momentum.

“Bank management teams are optimistic about the broader economy and confident in capital markets activity, while consumer spending remains steady.

“There are also signs that point to the sustainability of artificial intelligence (AI) demand,” UBS explains.

With the US Federal Reserve likely to cut interest rates further amid a resilient economy, the investment bank forecasts S&P 500 earnings to grow 11% this year and 8% in 2025.

“Reducing equity exposure in the wake of a ‘disappointing’ election outcome is likely to be counterproductive over the longer term, in our view – data going back to 1928 show that US equities tend to rise into US presidential elections and thereafter,” it argues.

UBS notes that the potential policy implications for the equity market will need to be viewed in the context of actual implementation and policy sequencing.

“For example, we believe the kneejerk market reaction to a Trump victory may be positive, as the risk of tax increases or greater regulation gets priced out.

“But markets would soon likely move to consider potential tariff and deficit risks, which could temper any rally.

“In fact, cutting corporate taxes would likely only be possible if the Republicans control both houses of Congress, and the cuts may only be introduced after potential trade tariffs come into force, which could have more negative macro and equity market implications.”

Similarly, UBS argues that while markets may initially show concern about some of the tax, antitrust, and regulatory aspects of Harris’ policy platform, many of these proposals are unlikely to be passed.

“In our view, the odds of her winning the presidency alongside control of Congress remain a remote outlier,” it says.

As such, UBS recommends investors to stay invested as a well-constructed portfolio management plan should be able to withstand the market volatility surrounding a close election.

“Investors can consider hedges if they are particularly concerned about election outcomes, including capital preservation strategies, structured notes, and exposure to hedge funds and gold,” it adds.