Key takeouts

• Trump's re-election signals a focus on tariffs, tax cuts, and deregulation, likely driving global inflation.
• Tariffs risk higher consumer costs, global trade disruption, and supply chain challenges.
• Rising inflation and interest rates may hurt equity valuations unless growth offsets these pressures.
• A strong dollar challenges emerging markets, but domestic growth drivers like reforms offer resilience.

After Donald Trump staged a stunning comeback to win the 2024 US presidential election over Kamala Harris, the world is bracing for another four years of unpredictable geopolitics and economic policies. For all intents and purposes, Trump’s win can be called a landslide, as he won all seven of the battleground states and even made ground in historically blue states. And with Republicans retaking control of the Senate and having also clinched control of the House of Representatives, the GOP now have sweeping powers to potentially ram through a broad agenda of tax cuts and spending, deregulation and anti-immigration policies that they have campaigned for.

The loss for Harris has been brutal and has left Democrats scrambling to understand what exactly went wrong. Despite record fundraising and aligning with celebrity star power, the party couldn’t appeal to the voter base on their key issues around women’s rights. When you look at the voting data, it astonishingly suggests that Harris underperformed (even Joe Biden) in the very categories that she was appealing to in her campaign, i.e. women voters, black voters, latino voters and even young voters… and in the end it came down to what Americans were concerned about the most: which is arguably the economy, and inflation.

The irony is that the US economy is, in fact, in the strongest position it's been in years if you consider GDP growth and employment data, and inflation has been coming down sustainably since 2022. Looking forward, it is difficult not to foresee a scenario where Trump and the looming Red Wave policies drive global inflation higher.

A centrepiece of Trump’s economic agenda is tariffs, where he has been very explicit that he will impose punishing duties on imports across the board, but very acutely on Chinese imports. “To me, the most beautiful word in the dictionary is tariff, and it’s my favourite word,” he told Bloomberg News in an interview in October. This promise has reignited the debate over whether tariffs are a useful tool for competing against economic rivals. In our view, tariffs are a high-risk strategy which has had mixed results in terms of market risk appetite and can backfire in the form of inflation.

While Trump argues that exporters pay for tariffs, in reality (and perhaps not well known) importers technically pay for tariffs, although that cost is often passed on somewhere in the system. Typically, the foreign company has two choices: it may decide to lower its prices to appease the importer, but it may also decide to invest large amounts of capital to build a factory elsewhere to avoid the tariff. Trump contends that foreign companies will bring manufacturing production to the US, and this will create jobs. However, historically this has not been an obvious choice by foreign companies, and in any event may takes years.

Furthermore, aggressive protectionist policies could also lead to retaliation by competing economies, which will undoubtedly impact global supply chains and hurt trade and growth across emerging markets, particularly those that are very reliant on trade, such as China. Another outcome can also be the importer (for example Walmart and Target who are among the biggest in the US) could raise the prices consumers pay at the checkout counter. Again, this passes the inflation burden onto consumers.

The inflation outlook is critically important when looking at market implications, as inflation expectations drive monetary policy which also impacts and cost of capital. Higher cost of capital is bad for equity valuations, and so from a long-term perspective, we would expect a scenario of higher inflation to be challenging for global equity valuations unless growth rates compensate.

Another longer-term market implication of a Trump administration we are concerned about is the US fiscal situation, where more spending and lower tax revenues is likely to deteriorate the structural mismatch between revenues and spending. The new Department of Government Efficiency led by Elon Musk and Vivek Ramaswamy has promised to restructure government agencies and so cut trillions of dollars of wasteful spending, however, this pledge feels optimistic.

With the current expectation of higher US rates from inflation and fiscal pressure, the higher carry when holding dollars have become more appealing. Dollar strength is unfortunately a headwind for emerging markets, and we are likely to see continued pressure on emerging market currencies, bonds and equities should this dollar strength remain. Emerging markets have been waiting a long time for the Fed’s interest-rate cut cycle to start and for the dollar to peak, which may now dash the hopes of kick-starting an emerging market recovery.

We wouldn’t, however, say it's all headed downhill for emerging markets, many are still able to use domestic growth drivers to stimulate growth. Fortunately for South Africa, some of our cyclical and secular growth drivers involve structural reforms that can boost private sector participation and unlock bottlenecks. In our view, South Africa certainly has the scope to drive this growth internally but will be limited by the lack of a commodity demand cycle should a Trump presidency and a strong dollar put pressure on commodity prices.

Like him or not, Trump will be the US president for the next four years and will likely induce additional uncertainty and an abundance of volatility in markets. And so, understanding that as an investor you can't react to news flow, and rather remain committed to your investment strategy that is focused on generating inflation-beating returns. So, let's strap ourselves in and enjoy the ride.