How to Trump-proof your portfolio

It was an emphatic victory for Donald Trump in the US presidential election, while the Republicans also scooped the Senate and, almost certainly, the House of Representatives. He may be personally unpredictable, but his economic agenda is relatively clear – tax cuts, deregulation and tariffs on US imports. That has long-term implications for the US stock market, but also for stock markets around the world.

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The early winners from Trump’s victory are clear. The S&P 500 is up, the dollar is up, and bitcoin has risen. Traditional energy stocks are up, while renewable energy companies have dropped. It was also a good day for US Smaller Companies, with the Russell 2000 up almost 6% on the day*. In other words, markets appear to be betting that a Trump presidency will be good for business and riskier assets.

This, in our view, is a reasonable interpretation. Deregulation should boost areas such as energy and finance, which have been constrained under the Biden administration. Smaller companies should also benefit from looser regulation and the drive to bring manufacturing back to the US from abroad. Lower taxes will oil the wheels of commerce and boost earnings and share prices.

The problem for many investors is that this is not where they have their holdings in the US. They are focused on the largest technology companies, which make up a significant share of the S&P 500 index. This has been absolutely the right area to focus on for much of the past decade, but its trajectory under a Trump presidency is more difficult to fathom.

These are higher growth companies, which tend to struggle in a higher interest rate environment. The Trump agenda could be inflationary, and there are signs that US treasury yields are starting to rise, suggesting the market believes interest rates will need to be higher in future. The technology giants are already very expensive – though their strong growth rates have kept their share prices buoyant.

They are also global and often reliant on other global companies to support their growth. Nvidia needs TSMC to turn its chip designs into reality, for example. In a world of tariffs and trade restrictions, they may find it more difficult to thrive.

Therefore, the first option to Trump-proof a portfolio is to look beyond the mega-caps and the index in the US market. Small and mid-cap companies could be a good option, and a natural complement to an S&P 500 tracker. We like funds such as the T. Rowe Price Smaller Companies or Schroder US Mid Cap funds. Another option may be to home in on US innovation on the assumption that areas such as AI will be allowed to grow unrestrained. The Baillie Gifford American fund would be an option.

The international angle

Investors may also want to insulate their non-US exposure from the potential impact of a Trump presidency. If Trump’s agenda could be inflationary in the US, it could be a drain on growth elsewhere. John Chatfeild-Roberts, manager on the Jupiter Merlin range of portfolios, says: “The proposal is a crude across-the-board 10% import tariff, with a 60% rate levied against China. The strategy is nakedly protectionist and in the case of China, punitive…Time will tell whether Trump’s strategy is an iron fist in a velvet glove, or merely a mallet with which to beat America’s economic adversaries.” 

The team at Evenlode point out that there is a difference between saying and doing. “Recent interviews with senior advisers to Trump suggest that the floated pre-election tariff level represents a maximalist stance (i.e. an opening gambit for negotiations). Given Trump’s highly transactional approach, it is even possible that negotiations end with no tariffs, and a new trade deal between the US and China.”

They say that US/China tariffs have limited relevance for many holdings. “Some don’t operate in the US at all. Others do operate in the US, but they sell services rather than ‘stuff’”. Nevertheless, it could be difficult for areas where companies are competing against home-grown alternatives, which will look cheaper – food, drink, basic consumer goods.

Pricing power, a unique product offering, a high quality management team that can adapt to a changing world, are all likely to be important in this new environment. We would favour funds that focus on high quality companies – Evenlode Global Equity, BlackRock European Dynamic, CT Global Focus – believing they can insulate investors in this environment.

That said, we would be wary of urging too many adjustments to portfolio positioning. The areas that are most affected, such as China, are already cheap, and it appears that Trump’s measures may already be factored into the price.

While Trump’s victory looks like it will usher in a buoyant time for markets, we would urge some caution. There are plenty of risks, particularly for companies outside the US. Trump’s ultimate agenda on tariffs and international relations may not be clear for some time. Companies will need to be flexible.

*Source: MarketWatch, 6 November 2024

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and fund managers and do not constitute financial advice.