Donald Trump’s return to the presidency marked a dramatic comeback after a polarising election. Trump ultimately captured all seven key swing states, positioning Republicans to regain control of the Senate, and potentially the House of Representatives as well.

While Trump is still a divisive figure to some, his win reflects the support of over 75 million Americans, more than 51% of the voting population, signalling a strong mandate for his administration. Backed by control of Congress, the new administration is poised to enact significant reforms. However, the economic and global landscapes differ considerably from 2017, with new challenges and complexities to navigate.

Trump now faces an economic environment marked by moderating inflation yet significantly higher interest rates, which could limit government spending, especially given the higher federal debt burden since his first term. Geopolitical tensions are heightened, with active conflicts in Europe and the Middle East, while trade relations with China face new restrictions, particularly in sensitive technology areas.

The US energy sector has evolved as well. Renewable energy incentives introduced under President Biden’s Inflation Reduction Act have been widely embraced across both Republican and Democratic states. The adoption of AI, which has driven energy demand among US tech companies with strong commitments to renewables, is also reshaping the landscape. Notably, Elon Musk, Tesla’s CEO and a major figure in renewable energy and electric vehicles, has emerged as a prominent influence within Trump’s team. These factors introduce more complexity to energy and economic policy decisions, which could affect the sector’s outlook.

Amid this uncertainty, we believe it’s wise to reduce exposure to environmental equities until the administration’s direction for the sector becomes clearer. Nonetheless, the administration’s generally pro-business stance is expected to help US companies, with potential measures like corporate tax cuts. However, policy changes such as stricter immigration and trade tariffs may drive short-term inflationary pressures and could keep interest rates elevated. While this environment may challenge more debt-laden companies, it is favourable for financial firms, particularly banks, prompting us to increase exposure in this sector.

Predicting other sector impacts is challenging without further policy details. Companies with significant exposure to international trade may face greater challenges than those primarily focused on services. As a result, we are cautiously reducing positions in the industrial sector and in strategies with higher exposure to trade-dependent sectors.

The election outcome signals the possibility of renewed economic growth, albeit with some associated inflation risks and potentially higher market volatility, echoing conditions seen during Trump’s first term. In this context, central banks may adopt a cautious approach, likely pausing rate reductions intermittently while moving towards neutral interest rate targets of around 3% in the US and 3.5% in the UK.

This setup is generally supportive for growth-oriented assets, including equities. Despite some companies experiencing challenges, corporate earnings have overall been stronger than expected. Consequently, we are comfortable maintaining exposure to growth assets, albeit with a strategic shift. Given the relatively lower downside risks to the economy, we are reducing allocations to defensive sectors like utilities and consumer staples.

Finally, recent market dynamics have offered an opportunity to adjust our bond exposure. We are slightly increasing our allocation to longer-term corporate and government bonds, funding this shift by reducing our positions in shorter-maturity bonds. This adjustment aligns our portfolio with expected economic conditions and reflects our ongoing commitment to a balanced, growth-oriented investment strategy.

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Please remember, this content is provided for information purposes only. Investment involves risk. Past performance is not a guarantee or indication of future results. Investment return and the principal value of an investment may go up or down and may result in the loss of the amount originally invested. All investors should seek professional advice prior to any investment decision, to determine the risks associated with the investment and its suitability.