Countdown to Trump inauguration – what next for equities, interest rates oil, gold and bonds

LONDON (Capital Markets in Africa) – Some of the turmoil we’ve already seen on financial markets is likely to continue as speculation swirls about Donald Trump’s trade policies once he’s back in the White House. There’s inevitably a lot of focus on what the impact could be for the global economy when higher tariffs are introduced. UK investors should brace for some volatile patterns of trading on the financial markets. However, it’s important to remember that investing takes endurance and patience and that the stock market has historically risen over the long term. However, it’s never been a perfect line upwards. There have been and will continue to be plenty of ups and downs along the way.  Investors should remember that it’s time in the market, rather than timing the market that can make all the difference to the success of an investment portfolio. If you take a look at the FTSE All Share, which includes the FTSE 100 – FTSE 250 and FTSE small cap index and is considered to be best performance measure of the London equity market. Over the last ten years it’s had lots of bumps in the road. However, studies show that in 91% of 10-year periods in the last 123 years equities have outperformed cash. 

Trump’s plans raise inflationary risks around the world
US exporters are likely to be hit by higher tit-for-tat duties in return if Trump introduces widespread tariffs. It’s likely that fresh round of trade wars will be inflationary as the higher tariffs feed through to higher prices for goods in American shops. This, in turn, may add to clamour for higher wages. Already concerns that this will drastically limit the Federal Reserve’s capacity to bring reduce interest rate has rattled bond markets, pushing up government borrowing costs.
If widespread tariffs are introduced, the mighty dollar could strengthen further, which risks importing inflation to other countries, including the UK. Many imports used in an array of goods which are bought on wholesale markets are priced in dollars , which will be more expensive if the greenback takes on more muscle. This could push up the prices of an array of some products on the shelves. If countries hit back with tariffs on imports from the US, that could also push up consumer prices. The risks of that happening in the UK are low, particularly given that Britain’s trade with America is focused on services, where tariffs are unlikely to be imposed.

Interest rate decisions could be affected at the Bank of England
Policymakers at the Bank of England will be assessing the potential inflationary risks ahead which a new Trump presidency is likely to bring. Government borrowing costs have risen due to spikes in gilt yields, as interest rates are expected to stay higher for longer, putting the Treasury in a tight spot. However, if Rachel Reeves is forced to bring in spending cuts or further tax rises, or if there are other detrimental effects of Trump’s tariffs to UK output, it may prompt the Bank of England to cut interest rates a little faster this year, than financial markets are predicting. There is also a chance that tariffs are not as punitive as the markets currently expect. If the polices are more targeted, inflationary risks could subside in the US and further cuts could be priced in, which would help calm the bond markets. As far as mortgage rates are concerned there has already been a very small rise in the rates being offered, following the drama in the bond markets. There is a risk they could rise a little further from here amid the uncertainty, but once the Bank of England start cutting rates again, they are likely to fall back. The better savings rates being offered may also hang around for a big longer, but there are also set to disappear once policymakers vote for a rate reduction, so it’s worth locking into a good deal sooner rather than later.

Impact on equity portfolios
Trump’s tariffs may help manufacturers focused on the US domestic market, such as car makers General Motors and Ford. Tariffs on big Chinese e-commerce players would also be a benefit to Amazon but also retailers with a big online presence like Walmart. Smaller US companies may also be beneficiaries, as they benefit from US supply chains being beefed up.
If the Fed, as expected, goes slow with rate cuts, the elevated interest rate environment may prove beneficial to the US financial sector, as it would boost net-interest margins, and bring in more money, with banks like Wells Fargo, Bank of America, as well as smaller lenders potential beneficiaries.  Trump is also expected to be keen for more de-regulation in the financial sector, having already presided over a loosening of standards when it came to maintaining specific levels of capital. This may make it easier for banks to loan out more money in the short term – but could lay the sector open to more risks longer term, particularly in the advent of another financial shock to the system. If Trump comes to power on a pro-business anti-regulation platform, there may be less rigorous enforcement of anti-trust rules which could lead to an upswing of M&A activity. This could benefit the major investment banks like Goldman Sachs and JP Morgan who are involved in dealmaking.
Companies operating in the gig economy have been under pressure during the Biden administration, with new rules put forward to make it more difficult for companies to classify workers as independent contractors rather than employees. Lighter touch regulation of the labour market under a Trump administration could benefit companies like Uber and Doordash, which are reliant on armies of the self-employed.
The main worry gripping the bond market is that a big swathe of US tariffs will stoke the embers of inflation and fan consumer prices. This has the potential to tie the Fed’s hands and limit interest rate cuts in the US even further this year. This is weighing on growth stocks, such as technology companies in particular, given that a higher rate environment pushes down the value of their future earnings. These concerns have been weighing on the so called Magnificent Seven companies on Wall Street, , but if Trump’s tariffs are less onerous and don’t lift consumer prices as much as forecast, there could be a rebound in the technology sector.

US drilling could help push down oil prices
Given the ‘America First’ mantra, another Trump Presidency is likely to place emphasis on energy independence and continue the increased pace of drilling permits, which has taken place under the Biden administration. Trump has vowed to accelerate the production of fossil fuels and roll back some of Biden’s greener policies in the inflation reduction act. The perception that Trump will be more pro-oil is set to boost the fortunes of the big energy giants like Exxon Mobil. The super-major is deeply involved in all stage of the energy lifecycle, from exploration to refinery and sales. Oilfield services supplier Schlumberger and equipment provider Baker Hughes should also be well placed to benefit if drilling picks up again.
Prices at the pumps risk been creeping up again after gains in crude oil due to fresh supply concerns prompted tougher sanctions on Russia. However, if the US produces more oil, it would boost supplies on world markets and potentially help lower prices. This is unlikely to happen in the short term, and energy companies may still be cautious about ramping up production, keen to ensure there’s the right balance of oil on world markets to stay profitable.
President Trump has been critical about the way NATO has been funded and has demanded other members start allocating much bigger parts of their budgets to defence. If he comes to power, it’s likely these calls will intensify and, unless they are met, there is the risk that the core commitment to the principle of collective security could be diluted. It’s likely that defence spending will be increased across the NATO alliance, which is set to benefit companies with ongoing military contracts.  Listed aerospace stocks are among those that might benefit from a fresh round of investment into bolstering armed forces.

Gold prices set to stay elevated
Trump returns to the White House as geopolitical risks remain high in the Middle East and the Russia/Ukraine situation is still unresolved. In times of uncertainty one investment which tends to do well is gold which has had a stellar run in 2024. While returns may not continue at this pace, the uncertain outlook, combined with increased buying from central banks, particularly in emerging markets, means that the commodity could continue to enjoy support.

Bond prices under pressure
Bond prices have come under pressure, and may continue to do so, but bond investors should not panic. Investment objectives should usually focus on longer-term objectives, and shorter-term volatility is to be expected. However, it’s worth investors reviewing where they’re invested and whether the split between shares and bonds is still what they want, given their objectives.
Rebalancing is a good investment habit to get into as it forces investors to sell things that have done well and buy those that have haven’t. That can seem illogical on the face of it. But it’s rare for something that has performed strongly to continue to perform strongly, especially over the long term.
You might think that yields could go higher, and you might want to try to time the peak in yields. That’s difficult to do and markets can move quickly, so it could backfire if yields suddenly reverse their current trend. Tactical changes to an investment portfolio, in the hope of a short-term profit, are almost certainly better to left to the professionals. Investors should consider holding multi-asset investment funds as part of their portfolio for this purpose.

Susannah Streeter, head of money and markets, Hargreaves Lansdown: