Global reverberations of the US election

Two weeks out, the storm that was the US election has given way to clearer skies—and more clarity on how the Trump administration might turn campaign promises into policy. Our CIO for Global Equities Stephen Auth recently outlined how the issues of tax cuts, higher tariffs, reduced regulations, smaller government, immigration reform and resolution of geopolitical conflicts might benefit the US economy. We feel progress on these factors could promote economic growth and drive the stock market higher, particularly for the small-cap and value sectors. Of course, the impact of the election is not limited to US equity markets. The world will feel the impact of major Trump policy shifts, and not always in obvious or intuitive ways. The Federated Hermes equity group recently hosted a roundtable discussion with our analysts covering Asia, Europe, Latin America and emerging markets about regions we anticipate will be most impacted.

Europe

We think Trump administration policies will likely hurt the European economy, though with specific winners and losers. The three main issues are trade relations, higher defense spending and a potentially robust US economy and dollar, aided by corporate tax cuts. Europe enjoys a large trade surplus with the US, which could result in the administration directing an array of tariffs at the continent. A shift in US national security policy that reduces support of NATO could require Europe to increase military spending. Finally, a strong, nimble and innovative US could increase economic competition. The recent dissolution of the German government underscores the political and budgetary pressures Europe is under. On the margin, we expect a stronger dollar, lower economic growth and higher fiscal spending, especially on defense.

The most negatively affected sectors in Europe could be the automobile industry, luxury good and any manufacturing with low asset exposure to the US. We expect mixed results for health care depending on drug pricing pressures and dollar exposure. European defense companies will likely benefit from increased spending, but US competitors may take market share unless Europe consolidates its fragmented industry. Those European companies with a large production presence in the US might compete globally on the back of a weaker euro. Value-oriented and high dividend-paying companies should benefit.

There is a silver lining. With the US becoming more pro-business and ramping down regulations, Europe may be forced to respond in kind, resulting in more pro-growth/supply-side policies. But if the Trump administration plans slow growth and prop up inflation, the Federal Reserve might slow the pace of easing, leading the European Central Bank to be more accommodative, which should boost eurozone GDP.

China

China joins Europe as likely being negatively impacted by the incoming administration. While China is likely to be the primary target of tariffs in the new administration, the risks of a trade war spurred by Trump’s promised tariffs might be somewhat priced in, as exporters have held up relatively well since election day. The hope is that any negative impact from tariffs may be cushioned by fiscal stimulus. In the wake of the election, China announced 10 trillion yuan of stimulus, primarily in the form of debt swaps. The reaction to this announcement, however, has been mixed. Domestic investors have been encouraged by the change in the government’s positioning and seem optimistic about the prospects for further measures in the future. Foreign investors, on the other hand, were disappointed, as they were hoping for a larger package—with some estimates as high as 12 trillion yuan, which included more support for property markets and consumers. The split verdict is evident in the relative performance of domestically dominated China-listed shares versus more globally available Hong Kong-listed shares.

Japan

Despite the fact many Japanese exporters have substantial production bases in North America, Trump tariffs could exert pressure on the country. For instance, most of Japanese automakers already have adjusted plans to produce electric vehicle batteries to comply with requirements of Biden’s Inflation Reduction Act. Trump could complicate this by making the landscape more favorable for US automakers. Also, Japan’s semiconductor segment already faces US restrictions from trading with China. A broadening of those limitations could hurt companies beyond chipmakers, including chemical and materials manufacturing companies.

India

US relations with India have strengthened over the years due to its role as a strategic partner to counterbalance China's growing military influence. That is likely to continue under Trump. However, India has continued to cultivate a relationship with Iran and Russia. While Prime Minister Modi has balanced the two sides well to date, it bears watching.

The Indian economy is largely domestically driven, so the impact of any Trump tariffs should be muted. In fact, higher tariffs on China may benefit India. But the net benefit will depend on its competitiveness versus onshoring and exports from other economies. Trump's new administration might pick up where his first one left off, focusing on reducing the trade gap with India, which would likely affect sectors such as agriculture, pharmaceuticals and autos. 

Changes in the US immigration policies, such as increased restrictions on H-1B visas, could affect Indian professionals seeking employment in the US. Most Indian IT companies have reduced dependency on H-1B visa holders and are primarily hiring locally in the US. Conversely, outsourcing could see an uptick in the event there are talent shortages in the US. In addition, US tax cuts could unlock corporate capital expenditures, which could translate into higher IT spending that would likely benefit the Indian segment. 

India imports around 85% of its oil needs, so is vulnerable to high crude prices. Trump's strong preference for traditional energy and policies to re-accelerate US oil and gas supply growth could bring midterm pressure to global oil and gas prices. 

Latin America

The election outcome is mixed for this broad region. These markets are full of banks and natural resources companies. The former could thrive if governments can uphold fiscal discipline; the latter will probably have to navigate relationships with both East and West. Increased border control could be positive for Argentina and negative for Mexico and Central America.

The election has put the Monroe Doctrine and its Roosevelt corollary back in play, in so far as they pertain to the perceived foes of China, Iran and Russia. This scenario is probably best for Argentina, mixed for Brazil, and unfavorable for others. Mexico has the most trade with the US and might return to the negative growth it experienced during last Trump regime. Brazil is a relatively closed economy and more economic exposure to China than to the US. But in all likelihood, Trump will be transactional rather than adversarial with most counterparties.