Trump 2.0: Policy disruption unleashed

Below is a commentary I wrote that was published by The Straits Times here.

In 2020, then US President Donald Trump spearheaded Operation Warp Speed to accelerate Covid-19 vaccine development. Nearly five years on, his return to the White House signals a similar urgency, marked by a flurry of executive orders and reversals of Mr Joe Biden’s policies.

With a reinvigorated “America First” agenda, Mr Trump’s early actions targeted not just domestic issues like border security and the cost-of-living crisis, but also high-profile exits from the World Health Organisation and the Paris climate accord.

Additionally, Mr Trump has also imposed fresh tariffs over the weekend, declaring a 25 per cent duty on most imports from Canada and Mexico, and 10 per cent on China goods. This implies that the President isn’t waiting until the wider policy investigation of unfair trade practices – that he announced on Day One – is finalised in April.

The administration’s aggressive reset of foreign relations with friends, allies and rivals alike is resoundingly setting the tone for a forceful Trump 2.0 era, as he heralds the start of a “golden age” of American dominance.

How should investors respond? By staying circumspect and tracking the economic reality within the US, even as we navigate a new regime of US trade protectionism ahead.

It’s always the economy

For starters, Mr Trump is presiding over a solid economy, even if it isn’t quite Goldilocks. A “Goldilocks economy” refers to an economic situation that is just right – not too hot (overheating with high inflation), not too cold (too slow growth or a recession), but somewhere in between.

Growth is cooling from a blistering 3.6 per cent annual average over the past four years, likely to a more sustainable 2 per cent pace.

The labour market has emerged from its soft patch and the two-year manufacturing recession appears to be nearly ending, setting the stage for benign growth in 2025, as deregulation and tax cuts offset the drags of broad tariffs.

Despite last-mile challenges, inflation remains on a favourable trajectory, with December’s core consumer price index rising 0.23 per cent on the month, below expectations of 0.3 per cent. Crucially, slower rent growth – due to increased housing supply – should help the Federal Reserve’s preferred core personal consumption expenditure inflation edge closer to its 2 per cent year-over-year target.

Notably, if the recently announced tariff increases are one-off as opposed to escalatory, this would not necessarily lead to sustained inflation, but a jump in the price level.

The Fed’s waiting game

Accordingly, the Fed’s hawkish hold in January likely reflects both its comfort with the state of the job market and the uncertainty with regard to the tariff regime. With wage growth steady at around 4 per cent, policy seems well positioned, leaving room for easing once the impact of the new administration’s policies is assessed.

Assuming largely one-off tariff increases, we anticipate two rate cuts in 2025, in June and September, totalling 50 basis points (bps) – bringing the upper bound of the Fed funds rate to 4 per cent.

Strikingly, the 10-year yield has climbed 95 bps since the Fed began easing last September, driven primarily by a 62 bps rise in real rates, signalling upgraded growth expectations rather than inflation fears. Once the Fed resumes cuts, the 10-year yield should drift towards 4 per cent by the year end.

The Tariff Man’s plans

On tariffs, Mr Trump’s salvo against key trading partners should not surprise investors. As we have noted previously, he is expected to pursue aggressive tariffs as a priority. Still, the scope, severity and duration of possible tariff outcomes remain highly uncertain.

Specifically for Canada and Mexico, we think the tariffs of 25 per cent, if sustained, would have a negative impact on the US economy – given that the two countries together account for about 30 per cent of the US’ total trade. But, on balance, we think it is less likely that these specific tariffs will be in place for more than six months.

That said, investors should brace themselves for more tariff disruption ahead, as US policymakers increasingly endorse them as tools to re-industrialise America and boost tax revenues.

In our base case, we continue to believe that the US effective tariff rate on China could rise to 30 per cent over time, from the current 11 per cent, with a phased implementation from the second half of 2025.

In turn, China has had years to prepare for this moment, and may counter with measured yet surgical retaliations, focusing on critical metals and components in supply chains that the US wants to reshore, particularly in defence and high-end manufacturing.

Watch the National People’s Congress in March for details – policymakers could enact a bigger deficit and a two trillion yuan (S$378 billion) to four trillion yuan package, but much still depends on the exact timing, progression and scale of Mr Trump’s tariffs. Meanwhile, the People’s Bank of China is doing the heavy lifting to keep rates near record lows, which still favour high-yielding state-owned enterprises.

Though Mr Trump has signalled a willingness to strike deals, any negotiations ahead could remain difficult. According to the Peterson Institute for International Economics, China notably fulfilled less than 60 per cent of its commitments in 2020’s phase one trade deal, particularly on energy.

To invest, stay nimble

Trump 2.0’s economic policies are ushering in a new normal of volatility spikes and unpredictable policy shifts. To navigate these challenges, portfolios should be well diversified and hedged. We like gold, a long dollar-yuan position and structured strategies, including in crude oil.

Despite the turbulence, US equities remain broadly supported by a healthy economy, gradually falling yields, and robust earnings – hence, we maintain our year-end S&P 500 target of 6,600, though near-term volatility is likely to be high.

While DeepSeek has startled investors, the broadening of artificial intelligence (AI) applications amid record capital expenditure should continue to benefit the leading-edge AI semiconductor makers and enablers. Additionally, accelerating electricity demand will likely drive growth in the power and resources value chain.

In fixed income, elevated yields create attractive entry points for high-grade and investment-grade (IG) bonds. Asian IG credit, in particular, is positioned to deliver 5 per cent to 7 per cent returns, driven mostly by carry and modest capital gains.

In currencies, we recommend harvesting volatility in key pairs, such as by selling upside in the Swiss franc versus the Japanese yen, and downside in the Australian dollar and British pound over six months, while avoiding major directional dollar positions.

Mr Trump’s second term has begun with a bang – this time, marked by greater experience and fewer constraints. As sweeping changes reshape the global economic order, investors are well advised to remain nimble and forward-thinking to grow and safeguard their portfolios in this dynamic new era.

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