Keeping Track of the Top Five Market Factors in Trump’s Second Term

As we head into 2025, US equities have experienced a surge fueled by the anticipation that Donald Trump’s potential election victory would draw more capital into the US economy. However, with Trump now implementing tariffs affecting US trading partners and the future of US exceptionalism appearing increasingly uncertain, this initial optimism seems to be waning, as global markets confront near-unprecedented geopolitical and economic turbulence.

The main goal of Trump’s policy is to decrease and overturn much of the spending and regulations introduced under Biden, while also aiming to further deregulate key financial decisions. This is intended to stimulate private sector engagement, halt the decline in debt, and alleviate inflationary pressures.

While this goal seems plausible when reviewing the context that has shaped the current landscape, the instruments Trump is employing to tackle the nation’s challenges are rather blunt and often contradictory. This poses a risk of triggering stagflation both domestically and internationally.

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In light of these events, investors must closely monitor emerging market trends to uncover meaningful global investment opportunities. Below, we’ve outlined our top five factors to keep an eye on.

Tariff policy challenges

Trump’s unpredictable presidential style should be taken seriously, though not always literally, especially regarding tariffs, which he partially uses as leverage to secure concessions from trade partners.

While tariffs might benefit select protected industries, they ultimately lead to increased inflation and consumer costs, which can compromise discretionary spending and consumer confidence—thus adversely affecting many in the attempt to boost fiscal revenue and secure concessions.

Combined with the rapid spending cuts from Trump and Musk, the overall outcome of Trump’s tariffs could likely lead to increased uncertainty, reduced US growth, minimal improvement in the debt trajectory, heightened inflation risks, and a Federal Reserve that balances these risks rather than slashing interest rates.

Given the extensive and varied nature of the policies being implemented, the chances of maintaining the strong US exceptionalism seen in the 2010s have diminished.

Prepare for ongoing volatility and unpredictability

While many investors interpreted Trump’s tariff threats as mere negotiating tactics, global markets have been rattled by his actual implementation of significant tariffs.

A fierce trade war and its detrimental economic effects, both in the US and globally, are increasingly probable.

Consequently, we anticipate heightened volatility as the market processes Trump’s statements alongside the tangible outcomes of those policies. Furthermore, this uncertainty is likely to postpone planned investments and consumption in the real economy, directly affecting growth.

The importance of global diversification is increasing

This environment raises the demand for diversification, particularly for defensive assets that possess distinct, robust themes. We have identified the following opportunities:

1. 1. We continue to favor gold as it thrives on rising policy uncertainty, the downside risks to growth, and potential tariff-induced inflationary shocks.
   2. The Japanese Yen also appeals to us; it is undervalued with improving fundamentals and stands to gain in a scenario where tariffs risk triggering recessions.
   3. Conversely, we have a negative outlook on US bonds. Poor fiscal dynamics and a flat yield curve, combined with the US’s reliance on external capital, render this asset class more vulnerable than it has been historically.

Global assets outside the US are preferable to US assets

If Trump’s trade threats lead to an all-out trade war, both US and non-US equities may suffer. However, we perceive greater risks in the US equity market, which remains overvalued despite the recent sell-off.

We believe there are more advantageous places to insulate portfolios from this risk without significantly sacrificing growth. For instance, China’s consumer and technology stocks have endured several years of foreign outflows, are under-owned, are less exposed to trade-related risks, and stand to gain from the cyclical and long-term rebalancing of the Chinese economy toward domestic consumption and services.

These assets are likely to benefit should trade tensions de-escalate and normalize, leading to capital flow out of the US, thereby favoring them over their US counterparts.

Domestic markets are rising, but not robustly enough to be immune

1. 1. South Africa is on a recovery path. Nevertheless, reform efforts are inadequate and slow, making the country reliant on a favorable global backdrop.
   2. After a substantial alignment of bond yields with the US over the past year, our domestic bonds offer less value currently and are susceptible to rising global bond yields should tariffs induce inflationary shocks.
   3. We foresee greater resilience in our equity market due to more attractive valuations and a favorable mix of some potential winners in a Trump 2.0 scenario. We specifically identify opportunities in Chinese technology, gold, gold mining, and defensive rand-hedged stocks, having significant exposure to these shares across our funds.

Zain Wilson is a portfolio manager at Old Mutual Investment Group.

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