The double victory of Trump and the Republicans (presidency-Congress) has sparked an extension of the “Trump trade” and this time a stronger dichotomy between the United States and Europe.
Donald Trump and the Republicans have won full power in the White House and Congress. This scenario, little anticipated by the polls, gave rise to an extension of the “Trump trade” (rise in equities, American long rates and the dollar) and this time a stronger dichotomy between the United States and Europe ( drop in equity indices and European long rates). Investors mainly remember from candidate Donald Trump a reduction in taxes for businesses as well as a deregulation program in the United States and for other partners including Europe due to an increase in import taxes. Just as they note a widening of public deficits (rise in real and nominal rates) and a more inflationary risk (rise in inflation break-even points). The movements have been violent since the beginning of October, when investors began to position themselves on the “Trump trade”, with the S&P 500 outperforming the Eurostoxx 50 by almost 9%.
Is Trump’s agenda so favorable?
If Donald Trump’s program contains many elements favorable to the economy and profits – it is estimated that the passage of corporate tax from 21% to 15% would increase the profits of American companies by practically 5% – it There are a number of negative measures: The expulsion of illegal immigrants. According to certain conservative assumptions, the negative effect of this measure on growth would be between 0.1% and 0.4% of GDP during the first year, according to Brookingsdepending on the level of implementation of the electoral promise. However, it could reach between 2.9% and 19.6% of GDP cumulatively over 4 years compared to a median growth scenario, according to the Peterson Institute. These estimates are based on numerous assumptions as well as on the relevance of the models used; we especially note that the effect of this policy cannot be neglected. The implementation of import taxes would also unequivocally have a negative role on American growth, the effects of which again depend on the assumptions used (10% or 20% on all countries depending on the declarations, and 60% on China), models but also the possible reciprocity of partners in the face of American tax increases. There Tax Foundation provides its own estimates but also a summary of others. The IMF assumes a recessive effect of between 0.4% and 0.6% of GDP for a 10% tariff increase.
In 2018, the Fed’s approach to the implementation of President Donald Trump’s tariffs was to consider that between the short-term inflationary effect and the recessionary effect, it could afford to grant more of importance to the second as long as inflation expectations were well anchored and the upward diffusion of import prices remained modest, which was the case at the time. But the context of 2025 is not that of 2018, with the Fed still unable to claim victory over inflation. Between the risk of tightening the labor market again with the expulsions of immigrants and the uncertainty over customs tariffs, we can imagine a central bank that is much more timid in its approach to normalizing monetary policy… especially so as not to have to take the path of rising rates!
Positioning data suggests that the “Trump trade” is already largely in investors’ portfolios, and that the euphoria of the American stock market is nearing its end.
In total, after this market movement consistent with what was possible within the framework of a Republican tidal wave, the agenda that the new administration will choose will determine the continuation of the impact on the markets of this political program which is intended to be radical and transformational.
Europe, excessive pessimism?
There is no doubt that the election of Donald Trump and his threat of customs tariffs (possibly reinforced on automobiles) accentuates investors’ skepticism about Europe, with Germany like France already encountering intense difficulties, even if they do not are not of the same nature. Let us remember, however, that European companies which have a cost base in the United States will benefit from the reduction in corporate tax. According to Morgan Stanley estimates, if the exposure of the turnover of the companies making up the MSCI Europe to the United States is 26%, the share representing exports of goods and therefore threatened by customs tariffs, is no longer than 6.2%. The discount on European stocks compared to American stocks has reached historic records even though Europe is not in crisis. We see that the index of economic surprises has tended to recover a little in recent weeks.
The change of government which is announced in Germany may deliver more favorable developments in budgetary matters, the president of the CDU, Friedrich Merz, recently showing a less closed attitude to a relaxation of the strict rules governing fiscal balance, on the condition that new spending be directed towards investment programs. Germany has all the budgetary levers at its disposal to bounce back, and if the political will is not yet clearly expressed, the political lines are moving, which will be an important element to monitor over the coming weeks .
Investment policy?
Between a “Trump trade” clearly at the end of its run and probably excessive pessimism on Europe, it seems to us that it is too late to strategically overweight American equities to the detriment of European equities. However, following the election of Donald Trump, we increased our exposure to American equities, but this was a very tactical movement. In return, we reduced our exposure to emerging equities outside China. Indeed, the threat of customs tariffs as well as the reduced visibility of the rate reduction cycle threaten the growth prospects of emerging countries and create more instability in their currencies.
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