A new chapter begins today

Today marks the official presidential inauguration of the 47^th President of the United States of America. Donald Trump will become the second person to hold office in two non-consecutive terms (Stephen G. Cleveland was the other one, in 1837). His presidency is expected to be surrounded by controversy given his previous term and his polarised views. He has been talking about a number of initiatives that could have a strong impact on financial markets if fully implemented: tax cuts, higher tariffs, deregulation, immigration and even military intervention in neighbouring regions.

The precise impact on the economy, and subsequently on financial markets, is difficult to estimate with any degree of accuracy as it depends not only on the magnitude of implementation but also on timing and the reaction of other countries, US companies, and central banks.

Taxes and Tariffs

Central banks have played a very important role since the Global Financial Crisis of 2008, sometimes with more success than others. We expect them to continue in that pivotal role. As the world is still shaking off the very high levels of inflation since the post-COVID period, tax cuts could have unintended effects:  Markets are likely to cheer the initial news, but much will depend on the timing and magnitude of implementation.

Proposed tax cuts could provide a short-term boost to corporate earnings and economic growth, but they also come with significant risks, given the U.S.’s fiscal position. With a debt-to-GDP ratio exceeding 120%, and interest rates around 4.5%, fiscal flexibility is limited. Additional tax cuts would widen the deficit, potentially pressuring bond markets and strengthening the dollar, which could harm US exporters by making their products more expensive overseas. Moreover, countries that have borrowed in dollars may face repayment challenges, adding to global economic uncertainty.

Higher tariffs are unlikely to have a positive effect: Capital and intermediary goods account for nearly 50% of US imports, and the proposed increases in tariffs would raise local production costs. These costs are likely to be passed on to consumers, at least partially, reducing demand and profit margins for companies. In addition, near-shoring promises and disruptions to global supply chains would increase uncertainty and provoke a downward adjustment of earning expectations. This doesn't even take into account retaliatory measures by affected countries.

If inflation rises because of these policies, the Federal Reserve’s ability to cut rates may be constrained, limiting its capacity to stimulate the economy further. This scenario could lead to higher bond yields, impacting rate-sensitive sectors such as utilities and real estate.

Take Trump Seriously not Literally

Trump’s presidency has long been defined by bold and often provocative rhetoric, consistently drawing significant media attention. Recent statements about territorial expansion involving Canada and Greenland, as well as a proposed name change for the Gulf of Mexico, exemplify this trend. While such remarks generate headlines, the market's focus should remain on tangible actions and their concrete economic implications.

Remember all the promised policies that were never delivered during his previous administration: repealing Obamacare, mass deportation of immigrants, deregulation, trade deals, higher tariffs, leaving NATO, and building a wall along the Mexican border… We know from experience that we need to take Trump seriously but not literally.

Separating Noise from Information

Our ongoing effort to separate noise from what is relevant will be increasingly critical in providing a clearer understanding of how Trump’s policies will impact markets and investment strategies.

Consensus expects continued US exceptionalism for 2025. Corporate earnings are expected to stay robust in the US, with a more muted outlook for other regions. The Asset Allocation Committee has decided to maintain a neutral stance for now. While we remain positive about the market's potential, it is too early to adjust portfolios significantly given the uncertainty surrounding Trump’s policies. The coming months will be critical in determining how his ambitious agenda unfolds and its impact on global markets. For now, caution and a focus on real economic data will guide our approach.

We keep a Constructive View

For now, we still see signs that point towards a continuation of the strength in US economic activity. Consumption remains strong, unemployment low, inflation contained, and profitability at healthy levels.

We reduced our allocation to equities in November, anticipating some softness after a strong year and higher volatility as the new president takes charge. Other geopolitical risks in the Middle East also contributed to this decision. However, we have only reduced equities to a neutral position, as we see the potential returns balanced with existing risks.

We are also neutral on bonds, cash, and gold and prefer to have more visibility before making any further changes in the portfolio. Stay tuned.