‘America First’ is already reshaping the world. Investors must act

US voters have cleared a path to unhindered ‘America First’ policies. The Republicans will likely control all four levers of US authority from the White House and both chambers of Congress to the already-conservative Supreme Court. The second Trump administration is already reshaping investments. Investors must adjust.

Donald Trump has the means to alter the US economy and financial markets, and a clear message from voters that they are seeking policy change. Whatever your political view, Mr Trump is poised to become one of the most influential US presidents in the country’s history. The implications are global.

Days after the vote and ten weeks before the new administration takes office, Europe, Asia and the Middle East are already feeling the impact. The German government has collapsed just when Europe so urgently needs strategic leadership. In Asia, China must adapt with its own stimulus to the prospect of punitive US tariffs, with a new package for local governments already announced on 8 November. And in the Middle East, events will surely unfold rapidly.

For investors, this shifts the risks, and the opportunity set

‘America First’ will deregulate key industries, lower personal and corporate taxes and introduce tariffs. The threat of tariffs is likely to become a major transactional tool of US foreign policy.

Domestically, this will lead to higher US nominal growth, higher inflation and interest rates. The rest of the world will have to respond with their own policy changes. The US will focus on domestic economic measures and scale back its foreign interests and ambitions. The post-Cold War paradigm of a globalised, mutually-interconnected network of trading blocs, regions and nation states can only fracture further. For investors, this shifts the risks, and the opportunity set.

Stay on the right side of US policy

A core investment principle is that markets are highly efficient, but also driven by trends and themes. US policy shifts are now taking the wheel in financial markets. It is vital that investors stay on the right side of these trends and avoid geopolitically exposed assets. This means focussing on low risk, liquid assets in markets that are grounded in the rule of law. Concretely, that includes the US, Swiss and European assets. Emerging markets and their associated asset classes are less appealing.

Such a profound transition demands careful risk taking. Over the last year we have increased the strategic weighting of US assets in clients’ portfolios and removed our standalone strategic allocations to China. This has driven strong portfolio performance.

Even after the recent rally, stronger growth, tax cuts and deregulation provide US equities with additional upside potential

Tactical tuning

Strong nominal US growth and higher inflation will force the Federal Reserve into fewer interest rate cuts than markets priced before the election. Even after the recent rally, stronger growth, tax cuts and deregulation provide US equities with additional upside potential. At the same time, government bonds look less appealing. The US dollar should remain well supported short-term given that interest rate differentials between the US and other regions should stay wider than expected. The US dollar should also benefit from inflows into US assets.

Our portfolios reflect these tactical convictions, and we have raised exposures to US equities, bringing our overall equity allocation above strategic levels. In parallel we reduced our tactical allocation to government bonds. We keep our preference for credit, both investment grade and high yield. We also maintain our overweight allocation to gold, which remains a useful portfolio hedge.

No rest for the invested

As a second Trump administration forms and its policies are implemented, investors must prepare for some inevitable turmoil in the US and elsewhere. Europe is likely to have a tipping point of its own with its leaders already looking to coordinate and early German elections. In China, we expect bank recapitalisation and central government stimulus measures to be announced in December, when authorities may have calibrated their responses to potential new shocks in 2025. Such trends must not be underestimated and there is no space for complacency. This is a time for vigilance and pro-actively steering portfolios to manage volatility.