The year of the vote

The following is an extract from our Q1 Asset Allocation outlook.

Polling indicates Trump could become the first president since Grover Cleveland to regain the presidency after having lost re-election. With real wage growth still sluggish, Biden remaining unpopular, and an electoral college system that benefits Trump-leaning rural voters,[1] Trump could certainly start 2025 in a new term as US president.

What would this mean?

Firstly, the stimulus taps could be back on. Trump has made no secret of his desire to make the tax cuts he passed in 2017 permanent,[2] costing about an estimated $3.5 trillion until 2033, according to the Congressional Budget Office. While equities might gain in the short term from these measures, with the Fed in inflation-fighting mode any new stimulus would keep rates higher for longer, reducing expected returns from Treasuries.

Secondly, the trade wars could return. Trump would likely extend tariffs[3] to both allies and rivals, looking to cut deals in the areas of trade, migration and security. Foreign equities, particularly in countries which export to the US, such as China, Mexico or Japan, could suffer in the short term, and tariffs could also push inflation higher, damaging fixed income returns. Nevertheless, some US equities might see some upside from reduced price competition.[4]

Lastly, strains on US institutions would probably increase. Trump signalled[5] he would re-impose an executive order ‘Schedule F’ making Federal employees easier to fire and use the Department of Justice to pursue political opponents. Such actions would heighten concern about the independence of America’s judicial and civil arms and would presage battles with the courts. This could also raise risk premia associated American assets, dampening global returns.

The UK goes to the polls

In the UK, a general election is expected later this year. The Conservatives trail Labour in the polls and barring a surprise turnaround, Labour leader Sir Kier Starmer looks set to take office by the start of 2025.

Although Labour’s policy platform is not yet finalised, there are a few hints of what they would change. Firstly, they plan to ease planning restrictions on construction[6] to encourage the building of new homes and other forms of physical investment. Secondly, a Labour government would likely ratchet up green investment.[7] Although the exact funding allocation remains undecided, Labour would seek to accelerate the development of green energy through subsidies, possibly similar to the Inflation Reduction Act in the US.

Lastly, taxes may increase.[8] Although differences in borrowing plans from Labour and the Conservatives are minimal, Labour would seek to finance higher spending by raising taxes on income and capital gains, which could weigh on equity and consumption performance.

In the coming elections, investors will brace for potentially seismic shifts in policy and geopolitics. The prospect of a new US president and a UK general election remind us that decisions at the ballot box can loom large in market psychology.

The above is an extract from our Q1 Asset Allocation outlook.

[1] Source: https://blogs.lse.ac.uk/usappblog/2020/10/29/why-donald-trumps-electoral-college-advantage-could-be-even-bigger-in-2020/

[2] Source: https://www.bloomberg.com/news/articles/2024-01-06/trump-considers-making-2017-personal-tax-cuts-permanent?leadSource=uverify%20wall

[3] Source: https://www.reuters.com/world/us/payback-time-trump-plans-mass-firings-deportations-second-term-2023-11-14/

[4] Source: https://www.cbsnews.com/news/steel-companies-benefiting-from-trumps-tariffs/

[5] Source: https://www.axios.com/2022/07/22/trump-2025-radical-plan-second-term

[6] Source: https://labour.org.uk/updates/press-releases/angela-rayner-speech-at-labour-party-conference/

[7] Source: https://labour.org.uk/updates/press-releases/ed-milibands-speech-at-labour-conference/

[8] Source: https://ifs.org.uk/sites/default/files/output_url_files/BN209.pdf