What Trump means for your money #NewsMarket

Shares in US companies rocketed and the dollar surged in the immediate aftermath of Donald Trump’s election victory this week over Democratic rival Kamala Harris.

While markets expected a Republican win, the decisive nature of the victory was welcomed by investors who had feared a more protracted battle.

As the dust settles, UK-based investors will now wonder what Trump’s win could mean for their personal finances and investments.

“Donald Trump’s election victory provided an immediate boost to a broad range of investments,” says Dan Coatsworth, analyst at investment site AJ Bell. “Longer term, there is a lot to consider under the return of a Trump administration and what’s worked for investors immediately after the election may not stay as the winning trades.”

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‘If Trump succeeds in imposing a universal 20 per cent tariff on all imports and raising the tariff on imports from China to 60 per cent we can expect interest rates to be higher for longer’ Read on

The election result sent shares in US companies to a record high on Wednesday, with the S&P 500 climbing 2.5 per cent, while the US dollar index, which measures the currency against a group of others, posted its biggest one-day gain since September 2022.

Experts say Trump’s pledges to impose trade tariffs and cut taxes should boost US economic growth but cause the cost of goods and services to increase. Such policies should buoy medium-sized and smaller US stocks, whose fortunes are more closely tied to the US economy. The Russell 2000 index of smaller companies jumped more than the larger S&P 500 on Wednesday, rising by about 6 per cent.

For British investors and consumers, the effect on sterling will be a key consideration. The pound was 1.2 per cent lower against the dollar at $1.29 by late Wednesday afternoon.

“A stronger dollar means it will be more expensive for UK consumers to buy US goods and travelling to the US will cost more,” says Andrew Hagger, founder of consumer site MoneyComms. “If the dollar continues to strengthen against sterling in the coming months, it could put upward pressure on UK interest rates and impact mortgage rates.”

Ben Yearsley, an investment director at consultancy Fairview Investing, points out that a stronger dollar means “lots of goods become more expensive to buy on a global stage,” noting that “petrol is the obvious example”. Higher prices at the petrol pumps will feed through into UK inflation, which in turn influences interest rates, he adds.

A stronger dollar would be positive news for multinational FTSE 100 companies that are listed in London but generate revenue in the US currency, such as equipment rental company Ashtead and InterContinental Hotels Group.

“Large-cap [UK] stocks will welcome a stronger dollar,” says Evangelos Assimakos, an investment manager at wealth company Rathbones. “If we see a reversal [in the dollar] smaller UK domestic businesses should do better by comparison.”

Trump’s policies are likely to benefit some sectors — such as financials and defence stocks — over others.

Susannah Streeter, head of money and markets at investment site Hargreaves Lansdown, believes Trump’s victory is positive for industrials because of the likely expansion of infrastructure building. UK-listed Ashtead could benefit as it provides industrial and construction equipment to a wide range of sectors and generates most of its revenue from the US.

Banking stocks exposed to the US economy could fare well if interest rates remain elevated for longer to combat inflation. “Barclays is one of the largest global investment banks and has a sizeable US credit card business so has the potential to make more money on loans in such an environment,” Streeter says. More broadly, US tax cuts and less regulation would support banking stocks.

Shares in defence companies are also poised to benefit from Trump’s focus on Nato members increasing their defence spending — something he repeatedly called for on the campaign trail. This could be a boost for UK companies such as Babcock, Serco Group, and BAE Systems, as well as US businesses including Northrop Grumman and Booz Allen Hamilton.

Another area of focus is technology. Trump has pledged to cut red tape, including an executive order from former president Joe Biden on artificial intelligence that was based on safety and security standards. Elon Musk, who runs Tesla and SpaceX, could take up an advisory role focused on cutting government expenses and regulation.

Shares in Tesla, which sells electric cars but is also considered a tech-focused company, surged nearly 15 per cent on Wednesday. Bitcoin also surged by more than 7 per cent to an all-time high of $75,389, as Trump has pledged to make the US “the bitcoin superpower of the world”.

Stephen Yiu, manager of the Blue Whale fund, says the “Magnificent Seven” US tech stocks — Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla — should react positively because Trump “is not a fan of regulation”, adding that “a lot of antitrust regulation could fade out now.”

The Magnificent Seven are so large that they represent about a third of the S&P 500. Index trackers and exchange traded funds, which also follow an index, are a low-cost and efficient way for British savers to invest in the S&P 500.

Analysts at Peel Hunt say Trump’s “pro-growth” policies could benefit UK tech companies such as Sage, while a trade war could lead to more demand for products from chipmaker Raspberry Pi over the long term, if demand for Chinese-made chips drops.

For some asset classes, the effect of Trump’s victory is less immediately clear. “Trump loves using the slogan ‘Drill, baby, drill’ and his election win has given a spark to US oil producers on the stock market,” says Coatsworth at AJ Bell, pointing to Chevron and ExxonMobil. However, any increase in oil supply could weigh on the oil price.

The price of gold, which is denominated in dollars, fell after the election result due to the US currency strengthening. But an increase in inflation would erode the value of the dollar and could fuel demand for gold as a way to preserve wealth.

“More government spending or more tax cuts would require more bond issuance, and that is where the attributes of gold, which has almost fixed supply in contrast to the endless soaring issuance of government debt, really shines,” says Guy Foster, chief strategist at wealth manager RBC Brewin Dolphin.

Bond prices also dropped in reaction to Trump’s appointment, sending up yields on US Treasuries. Markets are concerned that Trump could borrow more, increasing the deficit. UK gilts followed suit.

Some analysts expect a potential divergence of fortunes between the US and UK over time: while the US deficit could increase, the UK’s recent Budget should improve the deficit.

For investors holding Chinese funds or stocks, Trump’s tariff plans could spell trouble. “A lot of Chinese companies have made big money from selling goods into the US and now they face the prospect of smaller margins once factoring in tariffs,” says Coatsworth at AJ Bell. “Europe could also be a loser from US tariffs.

“Those on the receiving end of tariffs won’t necessarily roll over and do as they are told. They will probably retaliate and that raises the risk of a severe trade war.”

Assimakos says that “while there is still money to be made”, investors “need to be more mindful of the political risk that China carries,” noting that Chinese stocks could become more volatile.

Chinese stocks have already been on a rocky ride. Their performance over the past few years was weak until the Chinese government unleashed a huge stimulus package in September. Still, analysts have noted rising demand for emerging market funds excluding China of late, in part because of geopolitical risks.

Could UK mortgage borrowers feel the effects of a Trump presidency? Disruption to global supply chains and greater borrowing under the new administration could rekindle inflation. Added to the Labour government’s spending plans, this could mean interest rate cuts — following Thursday’s reduction to 4.75 per cent — arrive more slowly than anticipated.

So far, market measures of UK interest rate expectations have not moved decisively following Trump’s win. An alternate theory could play out, where Trump’s trade policies lead to an economic slowdown in the UK and Europe — leading the BoE to cut rates faster.

The UK Budget last week further complicates the picture. “We have got two pressures. One is the election in the US. And the other is the enhanced debt that you have from the Budget here,” says Simon Gammon, managing partner at mortgage broker Knight Frank Finance.

The BoE on Thursday said the Budget — which included £40bn of tax rises and billions in additional borrowing and spending — was likely to increase inflation. “The Bank of England implied that the Budget means rates will continue to fall only gradually,” says Paul Dales, UK chief economist at consultancy Capital Economics.

Mortgage lenders are already operating on very thin margins, and are competing fiercely for business. Recent market moves give them little room to cut rates further.

Two-year interest rate swaps — closely watched because of the prevalence of two-year fixed-rate mortgages — have hovered around 4.5 per cent since the Budget, up from 4.3 per cent before it and less than 4 per cent in mid-September. Five-year swaps have also risen, reaching 4.3 per cent.

Banks, which use such derivatives to hedge their interest-rate risk, typically pass on rising costs from these instruments to mortgage borrowers.

Gammon says the combination of the Budget and the US election probably means lenders will have to raise some UK mortgage rates as early as next week. Overall, he does not expect a big rise in borrowing costs but the most likely outcome in the longer term is “mortgage rates falling very slowly indeed”.

Additional reporting by Ian Smith