The Republican candidate has pledged significant tariffs on imports, including up to 60 per cent on Chinese goods.
However, Brent Puff, vice president and senior portfolio manager at American Century Investments, believes that, in reality, the approach will be more moderate.
“I think the biggest concern in the market as it awaits a Trump victory are some of his stated policies around trade,” he told InvestorDaily.
“My own personal view is that whatever policies are ultimately implemented on the trade front will be less extreme relative to the policy he has articulated as a candidate. That is not to say we are not going to have more tariffs in place, I think there will be, but I think they will be on a more moderate plan of action”.
The portfolio manager, who expects Trump to win a “very close election”, noted that, as president, Trump would aim to negotiate better terms with some of America’s trading partners and create incentives to encourage US manufacturers to keep production within the country.
On the economy as a whole, Puff anticipates that a Trump victory would spark a reflationary boost to the economy, triggering a “risk-on” response in financial markets, with procyclical sectors such as industrials, financials, and consumer discretionary likely seeing an initial positive reaction.
Puff noted that a Trump victory would likely prompt a rotation away from longer-duration growth assets, such as technology, and more defensive sectors, like consumer staples and utilities, while the 10-year bond yield would continue to drift higher, resulting in a “slightly steeper” yield curve.
Considering the converse scenario, he said the Republicans are likely to win the Senate irrespective of whether Kamala Harris wins the presidency.
“You will basically have the power split between Conservatives and Democrats and I think, for the most part, the markets will interpret that as a sort of the status quo victory. I would expect that to be much less of a reaction in financial markets.”
Market reaction
Puff emphasised that while markets may react sharply in the short term, the real question is their longer-term response.
“I think what we are likely to see over the next 12 to 18 months would be a greater participation from all parts of the market,” he said.
“I think the prospect for technology [sector] continues to be good, but other parts of the market that are more dependent on the overall health of the real economy should begin to participate and benefit a little bit more from trends that are likely to play out in the next 12 to 18 months.”
This period will likely include lower interest rates as well as improvement in economic activity.
Commenting on international equity markets, Puff predicted that the expected US election outcomes would similarly unfold abroad, as markets outside the US view Trump and Conservatives as “reflationary”.
“I think generally markets around the world will view it as something that probably leads to a bit more inflation and a bit higher interest rates.”
Magnificent Seven
According to Puff, the vast majority of the Magnificent Seven, except Apple and Tesla, will “enjoy a very healthy growth in their core businesses as the prospect continues to be favorable” under a Trump presidency.
However, he noted that one of the defining characteristics of equity markets in the US has been a concentration of returns in a very small subset of the market, represented by these companies.
Meanwhile, the rest of the market, which is more dependent on the growth of the real economy, has struggled as global economic activity has slowed.
“I think looking forward as inflation continues to recede, as interest rates come down, the prospects for global economic activity will stabilise and begin to reaccelerate,” Puff explained.
“I think those conditions are prerequisites for the rest of the market to participate in a greater degree in equity markets and I would expect a broadening of participation in the markets as growth improves as the part of the markets that is more dependent on the underlying real economy improves over the next 18 months.”
