Tariffs are by far the most important policy expected from new US President Donald Trump, according to UBS, which is now trying to diagnose what his rise means for the world’s politics, economy and geopolitical balances.
UBS points out that only a small part of European companies’ sales are actual exports to the US. Most products sold by European companies to the US are produced on American soil, making Europe less vulnerable to Trump’s tariffs.
That is, according to UBS, it is more likely that Europe will be affected by the blow that China will receive from the American tariffs, than the direct consequence that may arise from any trade protectionist decisions.
Commitments
UBS recalls that Trump campaigned on a platform of expanding personal income tax cuts, lower corporate taxes, deregulation, trade tariffs, immigration controls and reassessing America’s role in global affairs.
If Republicans secure control of Congress, the President would have more room to pursue his political agenda, UBS also points out.
In this environment, narrow congressional majorities could limit some policy measures, especially given already large federal budget deficits.
Tariffs are potentially the most important policy from an economic point of view. The proposed tariff of 60% on imports from China and 10% on imports from the rest of the world could make much of US-China trade unsustainable, reduce US domestic demand and corporate profits and lead to lower GDP growth around the world, especially in China. Such tariffs could also contribute to higher US inflation.
Of course, it remains to be seen whether negotiations, concessions on trade or other issues, or legal challenges may ultimately lead to lower (or no) tariffs being eventually introduced. It should also be noted that tariffs are also likely to take time to establish, which UBS says will likely take until the second half of 2025 or 2026 to be implemented.
On fiscal policy, UBS sees the election result reducing short-term fiscal risks related to government funding (deadline 20 December 2024) and the end of the debt ceiling moratorium (deadline 2 January 2025).
Trump campaigned on extending personal tax cuts that expire at the end of 2025, reducing the corporate tax rate from 21% to 15% and a range of other income tax breaks.
With the deficit as a percentage of GDP now double what it was at the start of Trump’s first term and interest rates higher, the “fiscal hawks” in Congress could choose to block or limit legislation that would widen the deficit further, and especially if congressional majorities are thin.
UBS expects the Fed to continue moving towards a neutral policy stance and will not change its outlook immediately, as uncertainty around policy execution remains high. An additional rate cut of 25 basis points on November 7 looks highly likely and in the baseline scenario, UBS expects a further 25 basis point cut in December and an easing of 100 basis points in 2025.
What will it mean for markets?
USA
US stock futures are moving higher today as the election results are tallied. In UBS’s baseline scenario, it expects the S&P 500 to rise to 6,600 by the end of 2025, a price return of nearly 15% from current levels, on the back of expectations for US growth, lower interest rates and continued structural growth certain branches.
Lower corporate taxes and/or deregulation of the energy and financial sectors under the Trump administration could provide additional support. Technology, utilities and financials are among the stock sectors that UBS finds attractive.
China
A Trump victory raises the possibility of very large tariffs on Chinese exports to the US and casts doubt on the outlook for Chinese stocks. At the same time, Chinese stocks are already cheap and markets will be watching the results of the National People’s Congress (NPC) Standing Committee meeting on Friday to see if Beijing can increase stimulus spending. UBS maintains a neutral stance on Chinese stocks for now.
Europe
The potential for tariffs is also worrying for European companies. About a quarter of the sales of European listed companies are in the US. However, UBS points out that only a small part of these sales are actual exports: most products sold by European companies to the US are produced in the US.
European companies exposed to China face more significant risks, according to UBS. The possible rollback of some of the US green energy initiatives may also weigh on parts of the European industrial and utility sectors.
Source: ot.gr
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