Donald Trump’s historic US election victory over Democratic candidate Kamala Harris has sparked immediate reactions across global, with significant implications expected for South Africa and emerging markets. Yet, while US equity markets hit a record high and the dollar surged the most in two years the historic result, the longer-term implications are far less positive.

This is according to Old Mutual Investment Group Portfolio Manager Jason Swartz, who says that Trump policies will be a shot in the arm for US corporates, which is something the market already knew going in, but over the longer term, Trump’s policies will eventually become a headwind for US equities, which will spill over into developed markets, with emerging markets also unlikely to benefit from a more protectionist environment.

However, South Africa could potentially provide some refuge in an emerging market universe under increasing pressure, he says.

“At face value, a red wave is good for equities and negative for bonds, which has already been priced into the market. But Trump’s well-known policy preferences around anti-immigration, trade tariffs and spending are all very inflationary,” Swartz highlights. “Therefore, the inflation narrative is going to be critical moving forward into this new administration.”

Expected tax cuts under Trump’s administration will create a tailwind from a profitability perspective for US corporates and a generally better risk appetite around deregulation will see US equities do better. But Swartz warns that these are short-term tailwinds that we would expect, and over the longer-term, Trump’s inflationary policies will mean higher yields and a higher cost of capital, which will develop into headwinds for US and global markets.

“Fiscal expansion, a cornerstone of the Republican economic plan, could lead to mounting US debt levels—projected to reach 122% of GDP by the Congressional Budget Office by 2034, with interest on this debt climbing to around $1.7 trillion,” he says. “This will weigh on economic growth and US corporates.”

So, while US markets might be gleeful terms of equity performance, Swartz is more pessimistic about the longer-term fundamentals and what higher rates, higher inflation and worsening fiscal performance will do to US corporates, US markets, and ultimately developed markets.

What we don’t yet know and deserves more attention, Swartz points out, is how a Trump presidency will impact the independence of monetary policy going forward – what does this mean for the Fed’s 2% inflation target, given the Fed’s more hawkish stance since 2022?

“Knowing his history of putting pressure on some of these federal agencies, he could reappoint the Fed board or chairperson; but whether he goes any further than this will be an interesting space to watch. What history has taught us is that political control of the central banks has typically always ended in worse economic outcomes, not better,” he says.

When it comes to the impact on emerging markets of this election result, Trump’s America First approach, focusing on trade protectionism, will see the tariffs and sanctions imposed disrupt supply chains and reduce trade volumes, which is negative for emerging markets’ growth, according to Swartz.

“The dollar has been the one big beneficiary of this win, which is worrying for emerging markets, particularly if it means that rates can’t be cut as much as previously thought. Dollar strength is therefore putting pressure on emerging markets, as well as currency and fixed income markets.

In the more immediate future, Swartz says that under Republican leadership, the US equity market could see cyclical sectors such as small caps, industrials, and regional banks experiencing a boost due to deregulation and domestic-focused policies. South Africa, however, could face capital outflows as investors gravitate towards higher yields in the US, leading to a weaker rand and increased borrowing costs.

“However, I wouldn’t say it's going to be all-fall down for emerging markets, many of whom 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 remove supply-side bottlenecks,” he explains. “In fact, South Africa could be seen as a haven in an emerging market universe that faces pressure from many sides. In my view, South Africa certainly has the scope to drive this growth domestically, but may be limited by the lack of a commodity demand cycle should a Trump presidency and strong dollar put pressure on commodity prices.”

Swartz goes on to say that with Trump returning to office, markets are certainly entering a period of upheaval. One consolation is that Democrats are likely to control the house – in terms of law making they can control what gets through to the Senate. “But this is a small consolation considering a fairly brutal election outcome for Democrats. However, in terms of Red wave policies, long-term inflationary pressure is where we should be spending the most time thinking about future implications of this election result.”