Unpredictability is a major part of Trump’s profile & it is difficult to guess how strong will he go in each of the above 3 areas. But we still try to estimate his action plan at our own risk. Our analysis is based upon his past speeches, his past executive orders as well as current team’s key stake holder’s key speeches & opinion pieces. We look at 3 key policy segments i.e. tariffs, tax cuts & immigration controls. We believe tariffs will be used definitely on a significant scale but more of negotiation tool than an actual outcome. This derives from the fact that despite recent increases US still has some of the world’s lowest tariff rates in 2022. So US does have the space to increase them significantly if Trump negotiation tactics don’t yield results in short term. Most affected might be China, Mexico & Canada. Trump’s team might work as a buffer against his ultra conservative agenda on tariff at least in the beginning. But if above countries do not yield to Trump, we should expect to see high tariff levels across product categories. So, the beginning of the Trump term might not see much tariff action beyond the word plays. But as we progress and if these countries don’t yield to Trump, expect higher and wider tariffs to begin. On tax cuts, we do not expect Trump administration to being able to reduce corporate tax rates to 15% against current 21%. A large group of republicans themselves might not support this in a thinly controlled Congress. The best-case scenario for us is a permanent continuation of 21% corporate tax rate. On immigration, it is perhaps one of the low hanging policy apples which Trump might act upon from Day One but any likely economic impact might take a long time to be felt. In conclusion, if we add likely impact of above 3 measures from Trump’s new administration, US economy might still show same 2.3% growth (without any policy changes in due course growth) in CY25 but with a slightly higher inflation mix. This implies a long status quo from Fed. This implies a higher for longer long end US bond yields in medium term. For DXY we expect a short-term correction as Trump’s inauguration might not be as hawkish in policy mix as fx markets are currently pricing in. Trump sees himself as a problem solver. We don’t think he will start his 2nd term by creating problems for US equities via too conservative policy announcements. Rather he might wait & gradually implement his plans if he does not get his way.
