Firstly, Gustavo Medeiros and Ben Underhill analyze the political context in which such a republican triumph occurred. In this regard, they agree with Clinton’s phrase “It’s inflation, stupid!” Given that the US economy was generally strong during Joe Biden’s term with an unemployment rate close to 4% and average GDP growth of 2.5%, furthermore since November 2020, the S&P 500 has risen by 55%, 12% annually. However, For most American workers, the higher cost of living, not rising stocks, low unemployment or higher wages, has defined “Bidenomics.” Therefore, they consider that inflation, along with cultural issues and concerns about illegal immigration, were the reasons why Trump and the Republicans swept. “This is of enormous importance for politics.”
Now, in an economy at full employment (and with services inflation above 4%), the full implementation of Trump’s campaign promises to massively slow or even reverse net migration, a widespread 10% tariff on imports and a 60% tariff on China would lead to lower growth and higher prices. Furthermore, further tax cuts that widen the fiscal deficit would require much larger debt issuance, which would likely be destabilizing. “Wall Street is enthusiastic about deregulation and reducing the size of government, but those measures are unlikely to fully offset the inflation and fiscal damage of the other policies. The reversal of some elements of the Inflation Reduction Act (IRA) is also at stake,” they explain.
This implies 44 basis points higher than when Trump’s victory odds began to rise in late September. In our opinion, Medeiros and Underhill point out, the “Trump unleashed” scenario with all the front-loading would cause yields to return to their highs and strengthen the dollar, and this would ultimately begin to bankrupt the most leveraged sectors of the economy, such as small businesses and private equity. “In such a scenario, emerging market currencies should be expected to fall against the dollar and emerging market stocks to sell off, although we expect emerging market currencies to outperform their emerging market peers.” developed countries, except the US, and that emerging market stocks have a better performance in both the US and developed countries in general,” they predict.
However, Trump often speaks exaggeratedly about his policies, especially on the campaign trail. “Actually, the scenario of a “Trump unleashed” It is unlikely, especially in the short term. Trump’s economic team is well aware of the need to take disinflationary measures first, giving the Fed room to ease monetary policy. Trump himself has said that inflation is a “destroyer of countries.” Therefore, in terms of sequence, we believe that in 2025 we will see a significant effort to reduce the size of government and a dismantling of spending plans linked to the IRA,” they explain.
In this sense, They report that of the 3.2 million new non-agricultural jobs in the last 18 months, 0.7 million came from the public sector, but in October, the private payroll in the US was reduced, so a slowdown in public employment growth would now have a considerable impact on the labor market. As for the IRA, Trump said he would “rescind all unspent funds under the misnamed IRA,” which averages about $50 billion per year in spending through 2030. These measures are actually disinflationary in the short term.
“In 2026, the main agenda will be to renew the Tax Cuts and Jobs Act (TCJA) and further reduce the corporate tax.” However, Scott Bessent, the hedge fund manager who advised Trump’s campaign and is likely to be the next Treasury Secretary, said that while these policies have led many to assume a larger fiscal deficit, This will only happen in a manner consistent with driving the fiscal deficit toward 3% by 2028.
“The plan is not for tax revenues to fall faster than public spending. The threat of tariffs will occur in parallel, starting in 2025. Higher tariffs will add some additional revenue, but will be more targeted and less disruptive than many fear, in our view. Immigration restrictions, also passionately promised, would be inflationary only in the medium term, through upward pressure on wages,” the Ashmore people expand.
Trade Wars II
Regarding the trade issue, Medeiros and Underhill point out that tariffs would generate higher inflation and lower GDP growth in the US, but would be disinflationary in emerging markets. “The degree of dollar strength depends on whether countries retaliate and other factors, but the expectation of a ‘grand bargain’ between the US and surplus countries (China, Germany, Japan) could curb excessive buying of dollars.”
For emerging market investors, the current context is more nuanced than the last time Trump was in office: technically and fundamentally, emerging markets are more attractive; The exposure of foreign investors to emerging markets has greatly decreased and the external balances of these markets have improved considerably; China’s export volumes were little affected by US tariffs during and after the first trade war, they were simply reoriented from the US towards Europe, Japan and mainly the emerging ones, this time, China is also ready to counteract trade pressures with more fiscal and monetary stimulus; And unlike in 2016, Mexico does not face the threat of being expelled from the North American Free Trade Agreement (NAFTA) after it was replaced by the new USMCA agreement during the first Trump administration.
“As in the first trade war, we believe that Tariffs will be applied in a phased and targeted manner. The initial focus will be on intermediated supply chain inputs with available substitutes, rather than on intermediate and inelastic consumer goods. This will have the desired political effect, while minimizing the inflationary impact. Tariffs will also likely start low and rise slowly, to force China, Europe and Japan to reach agreements to rebalance their large trade surpluses with the U.S. In our view, at the negotiating table, Trump will ask commercial reciprocity, national security and commitments to strengthen the currency.”
While the mechanisms to strengthen currencies vary: in Japan, higher interest rates would suffice; China manages its exchange rate, but improving confidence in local stocks, supporting public finances of local governments, the real estate sector and consumption would be structurally effective; In Europe, implementation of Mario Draghi’s plan would boost GDP growth and allow for higher structurally neutral policy rates, underpinning a stronger euro. “Ultimately, these are measures that coincide with the strategic interests of those countries, stronger currencies would also boost their purchasing power, which should allow for greater political stability.”
An elegant rebalance
Regarding the last trade war (2017-2019) with China and Europe, Analysts recall that it failed to resolve the persistent US trade deficit, which has its roots in structural issues, since the US invests more than it saves, which creates a need for foreign capital to finance the deficit, in addition, as an issuer of The world reserve currency must have at least a certain level of external deficit to supply global liquidity.
“If Trump really wants to balance the trade deficit, he will have to fix the US balance sheet. Bessent’s goal of reducing the deficit to 3% of GDP by 2028 could allow for deleveraging and an elegant rebalancing. This gradual fiscal consolidation approach would ease inflation, allowing the Fed to cut rates as US Treasury yields decline and the dollar gradually weakens. “This would support a natural rebalancing of trade and other macroeconomic conditions, including lower debt/GDP levels.” Therefore, this “elegant rebalancing” is the sweet spot for emerging market assets: higher growth in the US and lower macroeconomic imbalances would reduce risks to global financial stability; A weaker dollar would allow global savings to be reallocated from US assets to the rest of the world, supporting emerging market asset prices and better GDP growth performance.
But, the devil is in the details
“Reducing fiscal deficits while pursuing tax cuts is a difficult task, it is estimated that renewing the TCJA of 2017 would add $5.3 trillion to the deficit over the next decade, reducing the corporate tax rate by even a single percentage point, as Trump has proposed, would further reduce revenues by about $100 billion annually, Therefore, reducing taxes without widening deficits and reigniting inflation would require deep cuts in public spending as well as thoughtful deregulation. Details are yet to be announced, and the degree of credibility of this policy mix will be better understood during 2025.” Another huge problem, they warn, is the system of health plans. public pensions: Funds supporting pension payments are likely to be depleted during the Trump administration, requiring budget contributions that could snowball.
“In 2025, US GDP is likely to slow due to the partial liquidation of the IRA, the negative impact of tariffs on investment and consumption, and lower immigration offsetting the economic benefits of deregulation, but the devil is “In the details, let’s not fool ourselves, the markets will analyze the US trade and fiscal policy announcements carefully in the coming months,” hold at Ashmore.
Source: Ambito
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