This article is by Justin Rourke – Head of Advice at Armstrong Watson Financial Planning & Wealth Management and Richard Cole, Fund Manager at Future Money Ltd. We aim to provide you with our commentary on the latest economic and investment developments which are likely to be affecting your investment and pension portfolios.
We also provide regular webinars called “Making Sense of Markets” where they discuss the factors affecting economies and markets. Our last webinar was on 13th November. Please click here to watch.
In this latest market update we discuss the economic and market implications of the recent US Election and the return of Donald Trump as President.
The Trump Factor: Investing in a Changing World
The return of Donald Trump to the US presidency, coupled with a Republican victory in both houses of Congress, has important implications for global financial markets. This change in leadership brings expectations of stimulatory US domestic economic policy, disruption to global trade through the threat of tariffs and the potential for game-changing interventions on a host of geopolitical matters that investors must navigate. As the US readies for a second Trump term, it is crucial to understand the current landscape and consider how the future may develop when positioning investments to mitigate the risks and to capitalise on the opportunities that will come ahead.
What We Know
A large part of Trump’s popularity with American voters was their perception of a weak economy under Joe Biden and that Donald Trump seemed a safer pair of hands in this regard. Inflation had been uncomfortably high from 2021 to 2023 and while economic growth was also high, voters were more attuned to the elevated costs than they were to the favourable US GDP figures relative to other global regions. Trump didn’t provide any serious remedies to reduce inflation, yet his promise of lower taxes and reduced regulation won him support on economic grounds. Meanwhile, his ‘America First’ pledges on reduced immigration and increased trade tariffs were favoured for a combination of emotive societal preferences and concerns for the domestic jobs market.
Of these factors, the most important for international partners is Trump’s preference for trade tariffs. He has threatened taxes of up to 20% on all imports, with this number rising to 60% for those coming from China.
In the weeks since Trump’s victory, investment markets have been mixed in response. Equity markets have generally favoured the return of the president, while bonds have been less settled and the dollar has jumped in value. US equities are trading at high valuation levels by historic standards, reflecting investor optimism but also raising concerns about potential overvaluation. In contrast, European equities are moderately valued, while the UK, Asia, and Emerging Markets present more attractive valuations on a historical basis.
What We Suspect
In general, the reintroduction of tariffs is expected to be a negotiating tactic aimed at strong-arming partners into buying more US goods, rather than a purely dogmatic stance. However, the mere threat of tariffs can create market volatility and uncertainty. Additionally, inflation could well return as a concern, driven by higher import prices (from tariffs) and increased consumer demand (from lower domestic taxes). Consequently, interest rates and bond yields are anticipated to stay higher than previously expected, as the Federal Reserve could be forced to keep interest rates higher than would otherwise be the case.
All of the US’s trading partners will be braced for Trump’s return, with few feeling confident they can avoid the president-elect’s aggressions, but China in particular is expected to be targeted. While this will be a challenge for the country, which is already struggling with an underperforming economy, Beijing has not had its head in the sand over the direction Trump will likely take. Since the early autumn, China has been building a stimulus programme, which so far has consisted of sizable monetary and fiscal policy interventions as well as reforms in the banking and property sectors. It is not done yet, however, suggesting that there is a lot more stimulus that could be launched in the coming months, should it be needed. With the level of US hostility not yet known, Beijing is prepared to scale its support in line with the need that may arise. As such, while China at first seems likely to struggle with the new regime, with expectations already so low, the opportunity for a positive surprise is enhanced.
What We Do
In consideration of these factors we believe that volatility will be higher over the coming years. We expect that yields and interest rates will stay higher than was previously expected, as inflation likely increases. On the one hand economies will benefit from tax cuts and other fiscal easing in US and China, yet on the other tariffs will reduce global trade and higher interest rates will also be restrictive.
Against this backdrop we favour equity markets overall, but have concerns for areas with the highest valuations (such as US large-caps) and for assets with greater sensitivity to interest rates, such as long dated bonds.
Given these views, in the portfolios we manage at Future Money portfolios we have sold the positions in infrastructure, given concerns over their likely performance in an environment of stubbornly high yields. The proceeds from these sales have been split between US mid-cap equities and Japanese stocks. While we are nervous over stretched valuations in the largest US companies, outside of this bracket, valuations are at more normal levels. What’s more, with these companies likely to benefit from the expected high level of US economic growth, we feel that these positions are attractive. Meanwhile, the Japanese positions have been added in order to increase the international diversification of the portfolios, although this position hasn’t been added to the Income portfolio due to the low income yields available in Japan.
The return of Donald Trump to the presidency and the accompanying red sweep of Congress mark a significant shift in the global political and economic landscape. Investors must remain vigilant and adaptable, recognising the potential for increased tariffs, higher inflation, and elevated interest rates. By tactically adjusting the portfolios we manage at Future Money—selling infrastructure holdings, selectively investing in US equities, and increasing Japanese exposure while maintaining a bias towards bonds with low sensitivity to yield movements—we aim to navigate the changing investment environment, seizing opportunities for growth while protecting against areas of vulnerable valuations. The Trump factor, with its inherent uncertainties, underscores the importance of a diversified and active investment approach for the coming years. Opportunities will present themselves, but so too will risks.
Our Philosophy
Volatility is a part of investing which is why we always take time to understand how much risk any client is prepared to take before investing. We also generally believe in the benefit of diversification of assets to help manage some of the extremes of the markets. Taking a diversified multi-asset approach means that some assets can fair better in different market conditions as they are more defensive assets such as bonds, whereas during periods of growth equities tend to fair better.
Armstrong Watson, in addition to our full range of accountancy services, also have our own fund management expertise from the Future Money asset management team, as well as independent expertise from the wider market. We are able to use this to help provide insight, commentary, advice and support to our financial planning and wealth management clients.
A key aspect of our investment philosophy is that it is time in the market not timing the market, which is usually the best approach. For more information and guidance on Investing, please download our useful Introduction to Investing here.
At Armstrong Watson, our quest is to help our clients achieve prosperity, a secure future and peace of mind. We believe that for those people who are considering taking financial advice in relation to their savings and investments it may be a good time to do so to utilise existing allowances and tax reliefs due to the fact that certain allowances are frozen to 2028/29.
Important Information
Please note that the contents are based on the author’s opinion and are not intended as investment advice. Past performance is not a reliable indicator of future performance. The value of investments and the income derived from them can fall as well as rise and investors may get back less than they invested.
If you would like to discuss your investment portfolio please speak with one of our Financial Planning Consultants on 0808 144 5575 or email us.
