And finally, one of the most bizarre and exhausting presidential campaigns in history has ended. Perhaps not so surprisingly, given the results of other major elections around the world, the incumbent administration lost to Trump 2.0.
The second coming of a Trump administration will have repercussions on capital markets and inevitably there will be winners and losers. The extent to which new policies will affect the economy and markets is still up in the air as the execution of such policies could be messy. One thing is for sure, there will be little continuation with guidelines that were established by the Biden administration.
On the surface, Trump’s policies are viewed as far more inflationary than the status quo. Global confrontation, high tariffs and mass deportations are all classic inflationary dynamics. From an allocation perspective, this development puts a dent in our belief that bonds would have probably outperformed equities in the short to intermediate term. On a long-term basis, bonds may still retain the upper hand as equity valuations are historically high and forward returns from such lofty valuations have usually come in lower than the historically average.
As far as equities are concerned, besides the valuation issue, the short term is cloudier. On one hand, new policies such as lower corporate rates and deregulation are clearly bullish elements, at least on the short-term horizon. However, there is a possible global supply shock that could result from tariffs and changes to immigration laws. Such an economic shock, if large enough, could be a catalyst for a deeper correction.
When discussing equities, we should also look at what specific sectors could be favored by a new administration. At face value, it would seem that traditional oil and gas would have a better operational background than before. This will come at the expense of the renewables industry. From our portfolio perspective, this should ensure clear skies for our pipeline and storage exposure.
Traditional pharma could continue to see headwinds if the Department of Health ends up in the hands of Mr. Kennedy, an advocate of non-traditional policies.
Financials and Private Equity will find a much friendlier interlocutor with the new administration. Valuations in this space are already a bit extended but any correction may present longer term opportunities.
And then there is tech… From a fundamental perspective, tech is still the major leader of innovation and growth. However, it is also one of the most expensive sectors in the S&P500. Overall, the stance of the upcoming administration will probably be somewhat ambivalent. Trump 2.0 should be a friendly ally when it comes to deregulation and general attitude toward mergers and acquisitions. However, the mercurial approach typical of Mr. Trump leaves much uncertainty on the table. Ultimately, we see an idiosyncratic approach dictated by individual company’s posturing and behind the curtains deal-making. For example, watch what Peter Thiel does and says as he has bought himself great influence by placing JD Vance as VP.
In conclusion, we expect interesting times ahead and while some of our theses have changed because of the electoral results, we maintain our long-term returns expectations where we see equity returns to be positive but below historical averages and bonds still attractive as yields should remain above averages.