US election: What a Harris or Trump win means for investments

With the US election just a few weeks away and the polls indicating a tight race between presidential candidates Donald Trump and Kamala Harris, deciding who is favourite to be the next US president is far from clear.  

There are some economic policies that have been revealed by them that could influence financial markets and investment strategies. Understanding the implications of these is crucial for investors looking at the challenges and opportunities ahead.

The Trump presidential campaign comprises of tax cuts, in the form of lower corporate taxes and an extension of the personal tax cuts he previously put in place, which are due to expire at the end of next year. 

Trump is in favour of deregulation, as seen in his first administration and wants to return to ‘trade wars’ with the implementation of a universal 10% tariff on imports - and 60% in the case of Chinese imports.

Trump is also a climate change sceptic and supportive of energy independence, so he could rein back ‘green’ policies and instead encourage US oil and gas production.

A core component of the Make America Great Again (MAGA) agenda is supporting domestic production, which means encouraging local manufacturing and penalising companies that move production abroad. To incentivise this, he proposes a modest reduction in corporate tax from 21% to 20% but a deeper cut to 15% where products are made in the US. 

If Republicans gained a clean sweep of Congress and the Presidency, America would have a government that wants to boost domestic growth through cutting red tape and reducing tax. However, this could add inflationary pressures given that tariffs on imports are likely to drive up the cost of goods. 

That should prove a tailwind (a situation that promotes economic growth) for US equities, but a headwind (conditions that impacts negatively on economic growth or reduces profitability) for long-dated US bonds as the deficit could continue to balloon. 

Trump’s aggressive stance on China and desire to penalise companies that produce goods in lower-cost locations like Mexico, could have negative repercussions for emerging markets and could be a major and destabilising adjustment for a country battling to kickstart stalling growth. 

Defence spending rose significantly under the first Trump administration and if he adopts this in his second term then US defence companies could be beneficiaries of increased military spending by NATO members.

Overall, if the Trump presidential campaign is a success, the three sectors that could benefit the most from his policies include: oil and gas, industrials, and financials. The latter would benefit from deregulation and a less-strident position on anti-trust measures, which could result in more merger and acquisition (M&A) activity.

Increased M&A activity can result in improved productivity and innovation, which can result in higher profitability and growth and boost investor confidence as it drives up stock prices. If it's done successfully, it could also attract foreign investment, create jobs and stimulate economic growth. There are downsides to M&A activity too, such as job losses. This can, of course, impact on the stockmarket negatively too. 

Harris is hoping her policies will woo voters too. Many believe they will align with Biden’s administration and are likely to include a ‘green’ agenda and a more aggressive approach to anti-trust regulations (or competition policy), which means challenging the dominance of big tech.

Her ‘opportunity economy’ looks at expanding child tax credits, helping first time buyers and aiming to build three million homes in her first term with a focus on affordable housing.

Harris, who is also the current US vice president, advocates raising the corporate tax rate from 21% to 28%, increasing capital gains tax (CGT) and the top tax rate for higher earners. Higher taxes and more regulation under the Democrats could be a headwind for US equities which consist of a major portion of global equities. 

However, if budget deficits lower under Harris, this could be supportive of long-term US government bonds. While overall a Democrat clean sweep could be a headwind for equities, listed renewable energy companies and housebuilders could benefit from her policies.

If your portfolio has exposure to US companies in these sectors (renewables and homebuilders) it could benefit from Harris’ favourable policies. Of course, this is something to watch as the risk is that she could alter her policies once she becomes President, or she may be blocked from fully implementing them if the Republicans obtain more control. 

It’s important to check your exposure to US equities, which makes up around two-thirds of the MSCI All Countries World Index. Too much exposure to one sector could be risky for your investments as you’d effectively have ‘all your eggs in one basket’. Even without holding a dedicated US fund, you could have a greater proportion of your portfolio in US equities than you’re aware of through global funds.

It’s unclear whether big tech valuations will experience a correction but the economic fundamentals for the US currently look good. Falling interest rates against a background of no recession has historically been a very favourable economic backdrop.

If you are bullish (a positive outlook) on US equities and believe a Trump presidency will be a boon for equities, then one of the simplest ways to capture this is by buying a low-cost index fund. But given the focus on domestic growth, another way to capture potential upside is to invest in a fund with greater exposure to small and medium-sized companies.  

If the Democrats win, it could be full steam ahead on the green agenda, which means investors may benefit from increasing their exposure to a sustainable US fund. Bond funds may fair well for investors if Harris gets the deficit under control. 

If the Republicans win, it could mean less regulation and lower taxes which may benefit equity investors. However, investors may want to check their exposure to the bond sector as it may not thrive under Trump’s policies.

There is a variety of things that could affect your portfolio, including the volatility experienced in the run up to and after a major election.

With the US election on the 5 November 2024, there are likely to be many changes to consider. If you have any questions about your own financial plan or investment strategy, speak to your usual Evelyn Partners contact or your financial adviser. You can book an initial consultation online or call 020 7189 2400.