Now that Donald Trump is installed as the 47th president of the United States, the world is waiting to see what happens next. So how might the second Trump term play out? And what are the implications for your investments?
Trump won in November on a programme of cutting corporate taxes, rolling back regulations and imposing sweeping trade tariffs. There’s little doubt that he’ll press ahead with the first two items on his agenda. But tariffs could be different. Some commentators are optimistic that the tariff talk is largely a hardball negotiating tactic – bark rather than bite.
In that light, it’s worth considering what Trump did in his previous presidential term. Then, there was certainly real bite, including 25% tariffs on steel imports and 10% on aluminium. These applied to most countries, although there was room for negotiation in certain cases. Trump also imposed tariffs on solar panels, washing machines and a whole swathe of Chinese imports. So we should take the tariff threat seriously.
This time around, Trump’s proposals go much further. They include a 10% tax hike on all US imports and 60% tariffs on imports from China. Along with that, there’s a proposed levy of 25% on imports from both Canada and Mexico. For Europe, the figure has ranged from 10% to 20%. And for the members of the BRICS group of countries besides China, the proposed tariffs have been even more extreme – up to 100%.
Gain or pain?
Despite Trump’s assertion that tariffs will benefit the US, analysts predict varying degrees of domestic pain. The National Institute of Economic and Social Research (NIESR) has argued that a 60% China tariff and a 10% worldwide tariff could lower US GDP growth by between 1.3 and 1.8 percentage points, depending on how other countries retaliate. Meanwhile, tariffs could add as much as 5 percentage points to the rate of the inflation in the US.
The IMF concurs, noting that the short-term benefits brought by Trump’s policies of deregulation and looser government purse strings would be offset by the inflation stoked by tariffs and immigration curbs.
The impact of widespread tariffs would be felt far beyond American shores, of course. Global GDP growth would fall by an estimated 2 percentage points over five years, and there would be a sizeable dent in world trade. China would suffer too, of course, but not as much as Mexico and some of the smaller European countries. The NIESR study also suggests that the UK could be one of the countries hardest hit.
Are we headed for trade wars?
The risks are not confined to the tariffs imposed by the US. Retaliatory tariffs imposed on the US by other countries could lead to an outbreak of full-blown trade wars. If that happens, the main outcome would be higher prices for everyone – in other words, a renewed and prolonged surge in inflation.
That would cause central banks around the world to raise interest rates. And that in turn would make economic growth and corporate profits harder to come by – along with real investment returns.
A descent into retaliatory exchanges would also choke off many benefits of global trade. With supply chains under strain, the quality of many products would decline even as their prices rose. And selling goods in the US would be far less profitable for many companies around the world – something that’s of major concern to world leaders at the moment.
In this scenario, Britain might benefit from Brexit to some degree. In a world marked by hostility between the big blocs, not being part of a customs union might stand the UK in good stead. As a smaller, nimbler entity, the UK might be able to avoid being dragged into worsening trade hostilities and could gain from being able to negotiate bilateral trade deals independently.
The big ‘if’.
None of this is certain, of course. Not everything Trump says should be taken at face value – in the run-up to his inauguration, Trump floated a worldwide tariff of up to 20% on imports into the US, an idea from which he has recently retreated.
And we saw in Trump’s first term that tariffs could be both lifted and reimposed. For example, negotiations with Canada and Mexico led to their exemption from the steel and aluminium tariffs; conversely, tariff exemptions initially enjoyed by Argentina and Brazil were later removed.
So until we actually see tariffs implemented, it will be difficult to assess their effects and the extent to which certain industries could be affected.
The outlook for your investments.
This heightened uncertainty is challenging for investors. But we should remember that there will always be opportunities out there. We should also note that tariffs aren’t Trump’s only policy. The US stock market’s recent record high was prompted by excitement about the new administration’s tax cuts, which could benefit investors in US companies regardless of their location. And if US rates do stay high or even rise, the dollar should strengthen too – amplifying returns for UK investors with US assets. Of course, American assets will then be more expensive to buy, suggesting that now could be a good time to go overweight in the US – especially in the wake of the DeepSeek-prompted sell-off.
For investors, it may be worth considering a range options, including those beyond the US tech giants that were performing so well before the DeepSeek news broke. However, you must remember past performance is not a reliable indicator of future results.
The fact that US earnings have been broadening out beyond the tech titans should provide further encouragement here. And smaller US companies might benefit particularly from Trump’s proposed bonfire of red tape, as their compliance costs should shrink.
Take the following scenario: should full-blown trade wars erupt, portfolios with diversified investments that offer inflation protection could be an option. For example, this could include gold-related assets, inflation-linked bonds and infrastructure investments with built-in inflation protection.
By investing in a variety of assets and asset classes, you are exposed to a range of potential growth opportunities. However, good performance is never guaranteed, so while there can be potential for greater returns you could also get back less money than you put in.
In the early days of the 47th presidency, the uncertainty may be extreme. But greater clarity should eventually emerge.
We’re always here to help you do more with your money and investments. The topics discussed in this blog are covered by our Investment Management team during our Morning Markets videos, which can be accessed via your personal feed and directly on YouTube.
With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. This material is not a personal recommendation or financial advice and the investments referred to may not be suitable for all investors. Forecasts are not a reliable indicator of future results.
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True Potential Investments LLP is authorised and regulated by the Financial Conduct Authority. FRN 527444. Registered in England and Wales as a Limited Liability Partnership No. OC356027.
