Global Equities Under Trump: A New Era of Tariffs, Taxes, and Uncertainty

Published Date: December 3, 2024 | Author: Scott Klimo, CIO, Saturna Capital

Authors‘ views are their own and not those of HANetf.

Donald Trump’s victory in the 2024 US presidential election guarantees an altered economic, market and regulatory environment going forward. While differentiating between campaign rhetoric and future policy initiatives remains opaque, based on his previous administration, we can make some educated guesses.

Trade policy and tariffs

If there’s one thing we can say with certainty, it’s that Trump loves tariffs and they will be imposed/increased during his administration. We view a global 10-20% tariff as unlikely, as the US runs trade surpluses with many countries, including Brazil, the United Kingdom, Spain, Australia, and the Netherlands . Still, levies targeted at specific industries and nations will undoubtedly arise, with China squarely in Trump’s sights. Others at risk include Mexico, Vietnam, Germany, Japan and Canada based on their running the largest trade surpluses with the US1. While it’s easy to single out countries, we should not forget that US companies choosing to manufacture or assemble overseas account for a significant segment of the US trade deficit, whether Nvidia AI chips (Taiwan), Apple iPhones (China) or Ford Fusions (Mexico). Companies importing raw materials and/or intermediate goods for final production in the US account for another large segment.

"Implementing tariffs is to step into the world of unintended consequences."

The experiences of Harley Davidson in 2018-2019 provide a case study . Such gyrations aside, history tells us that countries facing tariffs typically experience currency weakness. Indeed, since Trump first imposed tariffs on China in early 2018, subsequently extended by Biden, the Chinese yuan has weakened by roughly 15% against the USD. To what extent that has been due to tariffs versus effects of the pandemic, problems in China’s housing market or other factors cannot be determined. Regardless, any significant tariff on Chinese goods would almost certainly lead to further currency depreciation. Indeed, since the start of October the yuan has shed just shy of 3% and is closing in on the post-GFC low of 7.35 to the USD.

Corporate tax rates and fiscal policy

Multiple tax give aways were proposed during the campaign, including no tax on tips, overtime or Social Security benefits, a reduction in the corporate tax rate to 15% from 21% currently, a permanent extension of the 2017 personal tax reductions and an increase to the $10,000 cap on SALT (State and Local Tax) deductions. We view the first three as unlikely, while there’s a reasonable chance the latter three are implemented. The wild card in that calculation will be the ability of the Republicans to maintain discipline in the House of Representatives given their narrow majority and a small but vocal group that stands adamantly opposed to any deficit increasing actions. An indication will come early in Trump’s term as the 2023 agreement to suspend the debt ceiling expires on January 1, 2025.

The Treasury can implement “extraordinary measures” to delay the reckoning but eventually the House will be required to vote on raising or suspending the debt ceiling. This time around it’s a fair bet that the Democrats will not provide an escape hatch without significant concessions. Will the Republican deficit hawks compromise and maintain unity or will they stand their ground leading to an even worse, from their perspective, agreement to keep the government funded? Tune in after the inauguration.

Whatever happens, and let’s hope defaulting on the debt is not a result, we are likely to see rising deficits (Elon Musk’s Department of Government Efficiency notwithstanding) that, along with the potential inflationary effects of tariffs and mass deportations of undocumented immigrants, could lead to higher rates and the possible return of the bond vigilantes.

Conclusion

The US economy currently enjoys positive momentum. The most recent Atlanta Fed GDPNow estimate forecasts Q4 growth of 2.7%, following 2.8% growth in Q3 and 3.0% in Q2. The performance has been impressive with US growth outpacing most developed countries and well ahead of the sub-2% growth experienced by the OECD as a whole. The momentum will likely continue through at least the first part of the year as policy changes take time to implement, and even longer to have an effect.

Anything beyond the first half of 2025 becomes increasingly difficult to predict given the results of the US election and the significant uncertainty regarding campaign promises versus policy decisions. Will Trump enact a global 10-20% tariff or is that a negotiating stance? Will Trump place a 60% tariff on Chinese goods? Will the various tax policies raised during the campaign be enacted? We believe the 2017 personal tax law that expires next year will be extended. We believe there’s a reasonable chance the corporate tax rate is lowered from 21%. Both have beneficial effects for consumers and companies, as well as potentially negative effects for the US budget deficit. They could also spur economic activity leading the return of inflation and a reversal of the current rate cut policy by the Federal Reserve.

We typically do not base investment decisions on economic views as we consider microeconomic developments (the potential productivity effect of AI, the surge in electricity demand, infrastructure development, etc.) to be far more significant in shaping investment opportunities. In the current unusually opaque environment, we are not making any judgements regarding potential sectors and companies, apart from being prepared for the implementation of various policies.

Professional investors only. Capital at risk.
Sources available upon request

Saturna Al-Kawthar Global Focused Equity UCITS ETF (AMAL) is an actively managed global equity ETF focusing on Shariah-compliant stocks with positive ESG characteristics.

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"Implementing tariffs is to step into the world of unintended consequences."