Tariffs and Inflation Set to Impact UK Investment Opportunities as Trump’s Second Term Looms

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Published: Nov 12, 2024, 16:53 GMT+00:00

Key Points:

Tariffs of up to 20% on global goods could a return in high inflation and high-interest environments.
Prospects of a stronger dollar and higher bond yields may push UK investors towards the US.
Incumbent President may be at odds with the UK’s pledge to cut CO2 by 81% by 2035.

The prospect of an unleashed Trump has already had a resounding effect on markets compared to his previous term, with US stocks and even cryptocurrency rallying to record highs. Despite the threat of tariffs, a core election pledge for Trump, UK and European markets also initially rallied in the wake of the results before pairing gains.

But what will the long-term impact of the Trump Presidency be on the United Kingdom’s investment landscape? Challenges may soon emerge as major changes sweep through the United States.

What Happens Next?

What do we know about how Trump’s second term will take shape? Core pledges to cut corporation tax from 21% to 15% for companies that manufacture in the US is a major indicator of the President elect’s protectionist standpoint.

These lower corporate taxes will help companies to grow their bottom line. Theoretically, this can drive growth through reinvestment, or for investors in share buybacks and dividends. Higher post-tax earnings can also help more stocks rally on Wall Street.

Higher revenue margins for businesses can also lead to higher wages, which would pave the way for better consumer confidence in the years ahead. But things are rarely simple and there’s no guarantee that any extra windfalls for businesses will be reinvested in growth or employee salaries.

Dan Coatsworth, investment analyst at AJ Bell, has warned that Donald Trump’s biggest challenge to lowering corporation tax could come from rising inflation rates as a result of higher tariffs.

With a proposed 60% tariff on goods from China and up to 20% for the rest of the world, the price of many imported goods will be likely to rise as the extra costs for companies are passed on to the consumer. The proposal could severely damage businesses without pricing power and cause of cost of living squeeze for consumers.

Trump’s stance on immigration may also impact US talent pools, with more American firms having to pay higher wage bills for future job roles.

As we saw from the failure of the Democrats to retain the White House, matters relating to the economy are a major concern for voters. The post-pandemic landscape has changed America dramatically, and it will be Trump’s control of the economy that’s likely to shape his second term.

Return of Inflation in the UK?

Although tariffs as high as 20% could have a significant impact on UK exports, the nation’s more service-based trade profile and domestically-focused economy is likely to soften the economic blow.

Another hope is that Trump takes a softer stance on the United Kingdom for its position outside of the European Union, which may see tariffs weigh in lower than the rest of the world.

However, Kallum Pickering, chief economist at UK investment bank Peel Hunt LLP, has claimed that Trump’s apparent anti-growth and inflationary stance could cause a weakness in bond markets, signalling a lack of confidence among investors.

Trump’s use of tariffs as a bargaining chip in international negotiations was a key facet of his first term in office, and it’s reasonable to expect that they make another appearance. However, the inflationary impact of tariffs could be more damaging, coming off the back of a battle to control historically high inflation rates in recent years. This could pave the way for a return of the Federal Reserve’s battle to soothe higher inflation with interest rate hikes in the months ahead.

What does this mean for the United Kingdom? Higher inflation and interest rates in America don’t necessarily mean the UK will follow suit, but the prospect of higher bond yields in the US could see more investors look overseas to build their wealth.

With gilt yields impacting other borrowing costs like mortgage rates, the return of Trump could carry an adverse impact on the British housing market also.

Likewise, the prospect of a stronger dollar as a result of Trump’s protectionist outlook will weaken the pound, making food and energy imports more expensive. However, a weaker pound can also help London-listed stocks that largely operate overseas, which can help to drive the FTSE 100 higher.

Defense and Oil Stocks to Flourish

The announcement by Prime Minister Keir Starmer that the UK is committed to cutting CO2 by 81% from 1990 to 2035, up from the previous target of 78% may also be threatened by the impact of Donald Trump.

The initiative could signify a period of prosperity for ethical investing strategies and ESG initiatives in the UK as COP29 once again pushed climate change into the global spotlight.

However, these initiatives could face fresh challenges from the US and Trump’s famously climate-sceptic mentality. Having repeatedly called climate change a ‘hoax’, Donald Trump’s election win saw renewable energy stocks tank on Wall Street, with short-selling hedge funds reaping the rewards.

As a result, there’s certainly some optimism on the FTSE 100 for oil stocks like Shell (LSE:SHELL), which could see the globally-focused oil and gas producer come into higher demand.

Elsewhere, London-listed defence firm BAE Systems (LSE:BA) has more than doubled in value, and Trump’s policy to improve the state of the US military is likely to drive the stock higher as geopolitical tensions continue to simmer globally.

Unpredictability Ahead

Unlike his first term, Trump will enter the White House for the second time against the backdrop of economic pressures. The tussle to strengthen the dollar will be threatened by inflation that could escalate with the return of higher tariffs on trade.

This could be seen as an element of unpredictability that sweeps the investment landscape in both the United States and the United Kingdom alike.

What we can be sure of is that a resumption of climate scepticism in favour of fossil energy and defence spending is on the cards, which may see more investor interest in the FTSE 100’s clean energy stocks follow suit.

UK investment opportunities will likely hinge on the state of the US bond market, which could drive investment overseas should rates increase in line with the dollar. However, investors may find that they’re best served by taking advantage of prospectively higher interest rates in the future with stronger savings account yields to boot.