America first: 3 initial market impacts from the new policy playbook

Deregulation, corporate tax cuts and higher uniform tariffs – incoming US President Donald Trump can pursue these campaign pledges after winning the popular vote and majorities in both chambers of Congress. Such policies can reshape global growth dynamics in the US’s favour. Here we outline a trio of potential economic effects and their implications for financial markets.

1. High-pressure economics

In 2016, then-Federal Reserve Chair Janet Yellen outlined the potential benefits of maintaining a "high-pressure economy" as a way to counteract the Great Financial Crisis. Such an economy operates above its usual capacity in order to keep recession at bay, albeit at the expense of higher inflation. Trump’s policies, combined with the Federal Reserve's commitment to cut interest rates, could apply this concept.

Growth and inflation expectations would initially be affected. First, corporate tax cuts are likely to support higher US growth but also increase the budget deficit. Second, with 10-year inflation expectations 30 basis points higher than in September, the market anticipates price rises over the long term. A key distinction is that while growth is expected to improve in the US, inflation is anticipated to rise globally.

That said, central banks are not expected to recalibrate their intentions to ease monetary policy. The overall economic outlook for 2025 suggests higher growth and inflation, but lower short-term interest rates. What could be the consequences for financial markets?

FIG 1. 2025 GDP growth market consensus (left) and 10-year expected inflation from market measures (right)¹

Strategy positioning 

The allocation views of investment teams across the asset classes remain balanced, although risk assets and bonds exhibit particularly appealing prospects.

Multi asset. The All Roads team maintains an overall neutral outlook has become marginally more bullish, with its allocation to cyclical risk premia rising to 45% versus 55% to hedging assets.  
 
Fixed income. Anticipating that the rise in yields will soon peak, our Global Fixed Income team sees opportunities to lock-in this value now for 2025. It is positive on investment grade but neutral towards high yield and defensive on emerging market hard-currency bonds. Our Asia Fixed Income team remains overweight duration, India, commodities and high-yield sovereigns.

Convertible bonds. Positions held by our Convertible Bonds team are aligned with so-called ‘Trump trades’ favouring defence, US financials and the artificial intelligence value chain at the expense of European and Chinese exporters, and the value chain for renewables.

Equities. In the World Brands strategy, the team is increasing exposure to US brands, focusing on the technology, financial and digital sectors, as well as small caps in the US. Exposure to defensive sectors in all other regions is being reduced. Our Swiss Equities team favours cyclical sectors like information technology, materials and industrials at the expense of defensive sectors such as consumer staples and healthcare. The Asia Equities team remains overweight consumer discretionary stocks and its constructive view on China is mainly focused on the internet sector. It maintains a slight underweight to India.

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