US Election – Where to for Portfolios?

The election of Donald Trump is widely expected to lead to inflationary policies, particularly tariffs, which are likely to impact various sectors differently, but lower overall global growth. While some industries (like US steel and companies with offshore USD earnings) stand to benefit, others (like commodities and real estate) may face challenges from higher interest rates required to combat inflation. But beyond that, the main difference is increased uncertainty: economic policy and geopolitical tensions are much harder to predict with Trump in the White House.  

Therefore, portfolios should stay diversified, be mindful of sector and country risk in equities, and maintain some unhedged international equity exposures to benefit from a strong USD. In fixed interest, we expect US interest rates to remain high, which will also keep Australian long bond yields slightly higher. For portfolios with a large allocation to equities, such as a balanced or growth profile, bonds are still attractive if the term spread over cash is positive because they should do well if a sudden economic shock sends equities falling. However, for lower risk profiles with less equity risk to offset, the extra interest rate risk is unattractive, so we would also recommend structural allocations to short duration credit.  

Additional details on our views are provided below. 

Economic Impact

• Perception vs. reality of “pro-growth” policies: while Trump is often seen as pro-growth, his proposed policies—like tariffs and deportations—are inflationary and would slow overall economic growth. However, tariffs typically take time to impact the broader economy and deportations are likely to face significant logistical challenges, making them harder to implement. 

• Tariffs on imports: tariffs would favour many domestic producers in the US, particularly in heavy industrial sectors. With reduced competition from imports, these companies may gain market share and raise prices. However, the impact on the broader US economy would be slightly negative. Tariffs usually take some time to fully implement (about 11 months), but markets are already pricing in these anticipated changes. 

• Rising volatility and uncertainty: the uncertainty surrounding Trump’s policies (and the global response to them) will increase market volatility. Investors should be wary of taking too much risk on any one theme or market segment when government policy can change rapidly.  

• Higher interest rates and US dollar: the US dollar should remain high relative to the Australian dollar. This is partly due to higher interest rates in the US, partly to ”flight to quality” where investors seek safe-haven assets (like US treasuries) amid rising uncertainty, and because Australia’s exposure to China (through trade) makes the AUD vulnerable to the fallout from any US/China trade war. 

Equity Sector-Specific Effects

• Steel producers: US steel producers will benefit if tariffs limit China’s steel exports to the US.  

• Companies with offshore earnings: companies with significant offshore earnings should also benefit from a higher USD. 

• Risk to commodity producers: retaliatory tariffs from China and falling Chinese demand for raw materials would be harmful for commodities. 

• Real estate: real estate investment trusts, which have performed well recently, would struggle if interest rates rise.  

Portfolio Strategy

• Diversify equities: higher risks of changes in government policy and geopolitical tensions mean sector and country risks have increased. 

• Unhedged international equity exposure: maintain at least some unhedged international equity exposures, meaning that the falling AUD will help boost returns for investments outside Australia. 

• Fixed income strategy: a mix of long duration fixed income and floating rate credit exposures. Low term spreads for long duration fixed income are not very attractive on their own, but long duration bonds help mitigate equity risk. 

• Cash reserves: higher cash positions provide flexibility to take advantage of opportunities as they arise in the market. 

Important information
Past performance is not a reliable indicator of future performance.
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