Investing in resilient corporates which can weather such rapid transformation – and also the prospect that changes may not take place smoothly – will be key
With US president-elect Donald Trump having nominated his Cabinet for his second term, it is clear is that Trump 2.0 will not be a repeat of Trump 1.0. Rather, it will be the second chapter in his transformation of the US economy and the world order that began in 2017.
Perhaps his most surprising Cabinet choice has been not picking former US trade representative Robert Lighthizer – the architect of Trump 1.0’s tariff policies – for the 2025 Cabinet.
In fact, the choice – combined with the US Treasury secretary nomination of Scott Bessent, who has deemed tariffs as a “negotiating tool” – suggests a reduced likelihood of wide-ranging global tariffs in the first year of Trump’s second term.
Instead, keep an eye out for the initial tariff policy that will focus on pressuring Mexico and Canada into concessions ahead of the 2026 renegotiation of the US-Mexico- Canada Free Trade Agreement.
Tariffs on China likely fall into a different category. The nomination of China “hawks” as secretaries of state and defence, as well as national security adviser, highlights that the tariff-focused China policy may be more wide-ranging under Trump 2.0.
As announced recently, China tariffs will likely come early and potentially escalate throughout 2025. Unlike in 2018, they will probably be accompanied by broader “national security” measures eliciting a similar, multi-pronged reaction from Chinese authorities.
Indeed, China’s moves on rare earth metals and its antitrust investigation against artificial intelligence chip giant Nvidia likely represent its first salvoes in response to Trump’s incoming policies. This is also as the Asian nation seeks to influence the shape of the US-China relationship.
Expect China to accelerate its domestic transformation, weaning itself from reliance on American demand while repairing and rebuilding its financial architecture so that it has a stronger foundation for growth in the 21st century.
European impact
Although Europe has flown under the radar in the run-up to 2025, Trump’s recent visit to Paris highlighted that defence spending and Europe’s role on the continent will once again be an American focus.
In his first term, Trump chastised European North Atlantic Treaty Organization (Nato) leaders for failing to meet their commitment towards defence spending of 2 per cent of GDP, as agreed in 2014. It has taken a decade for Nato allies to finally reach this threshold.
Recognising renewed pressure, European Commission President Ursula von der Leyen recently called for increased defence spending beyond the 2 per cent baseline. The appointment of Andrius Kubilius as the European Union’s (EU) first defence commissioner also indicates new European resolve on this front.
Europe may have less leverage, however, than China in shaping transatlantic relations, given the tension that increased EU defence spending will put on already-strained budgets. Investors, though, should not underestimate the prospect of a similar constraint on incoming US president Trump.
Despite his party controlling both houses of Congress, Trump should be wary that the budgetary woes that have befallen both the new UK government and the recent French government – following their own 2024 elections – may once again emerge in the US.
Indeed, Trump and Congress will undoubtedly seek to fulfill campaign promises of lower taxes and increased spending, while also preventing the US deficit from expanding beyond the already historically large 6 to 7 per cent of gross domestic product.
In recognition of the US’ own fiscal excesses, Elon Musk and Vivek Ramaswamy, advisers to Trump’s newly created Department of Government Efficiency, have outlined a traget to find US$500 billion in federal budget savings annually.
While on the surface a substantial sum, it represents only 25 per cent of the estimated 2024 budget deficit, and just 7 per cent of overall federal spending.
Reaching half a trillion dollars in savings would itself be impressive given that the bulk of these reductions would likely have to come from government “discretionary” spending, which totalled only US$1.7 trillion in 2023. This suggests a high hurdle for the new US administration to find substantial cost savings.
Aggressive and creative reallocation
The prospect of aggressive and creative reallocation of US government spending appears likely in Trump’s second term. This is especially considering Treasury secretary nominee Bessent’s focus on fiscal sustainability, and management and Budget office head nominee Russell Vought’s priority on reining in federal bureaucracy.
Foreign and fiscal policies are not the only areas in the new administration’s crosshairs. Robert Kennedy Jr’s nomination to lead the Trump health agenda looks likely to disrupt “Big Food” and perhaps even “Big Pharma” as he shifts the regulatory landscape in both arenas.
However, slim Congressional majorities and other more pressing Trump legislative priorities will push the timing of large-scale changes to beyond 2025.
In contrast, Thomas Homan, Trump’s “border czar” nominee, has been tasked with slowing the flow of illegal immigration into the US, as well as beginning deportation proceedings against at least a fraction of the estimated 10 million individuals that have entered the US under Joe Biden’s administration.
Recall that this stream of undocumented workers has ballooned the American labour force and kept wage growth in check in recent years. Should these efforts be successful, they may create a catalyst to inflationary pressure by constraining an already-tight US labour market.
Just a few weeks remain before president-elect Trump takes the oath of office, and his new administration’s priorities and agenda details remain unclear. But what is unambiguous is that the Trump 2.0 nominees are being tasked with changing the American status quo, both within the historical operating framework of the world’s largest economy, as well as how the superpower interacts – financially, commercially and from a national security perspective - with allies and adversaries alike.
Moreover, with only four years in Trump’s final term as president and only two years of assured Congressional majorities, Trump will likely need to mimic Silicon Valley’s famous “move fast and break things” mantra, as the new administration seeks to reshape America and the world order.
Investment strategies for 2025
For investors, such a potentially rapid pace of change should bring not only opportunity but also risk. Bond markets and equity markets alike, however, are pricing in the opposite.
Equity volatility, as measured by Cboe’s VIX index, and bond volatility, as measured by ICE Bank of America’s Move index, are both not only approaching their lows of 2024 as the year comes to a close, but also their post-pandemic era troughs.
Therefore, as the calendar turns to 2025, active rather than passive investing strategies, and investing in resilient corporates which can weather not only such rapid transformation but also the prospect that changes may not take place smoothly, will be key.
Simultaneously, assets such as gold, hedge funds and other alternative strategies will be valuable components in portfolios to contain periodic bouts of increased volatility in 2025.
