UBS Research predicted in a recent report that if former US President Donald Trump wins a landslide victory in the elections in November, the US economy and the stock market might see improvements. However, it is uncertain whether the bullish trend will last for long.
UBS analysts have found some efficient tools which if employed by the Republican government could make the economy slightly better than it is now. The first and most obvious step is a sharp tax cut. To the joy of Donald Trump, this would entail an almost inevitable drop in the US dollar’s value.
The enthusiastic Trump administration is expected to take bold steps in cutting taxes, especially for businesses. This would encourage a sharp increase in profits and investments. So, investors will greatly benefit from the strong performance of US companies.
Besides, Trump is expected to relax regulations, giving all entrepreneurs more freedom and saving them significant sums on compliance costs, especially in industries where regulation is crucial.
Another important point is that Trump always advocates for a “cheap” US dollar. UBS admits that an international agreement to reduce the dollar's value will likely remain a dream. However, the US might find ways to fine-tune the value of its currency.
Trump’s protectionist trade policy aims to support domestic production. Therefore, it could give American companies an advantage over their foreign competitors.
Some sectors are likely to welcome Trump’s return more than others. For example, the financial sector is already anticipating deregulation and a wider spread between short-term and long-term interest rates. Corporate mergers and acquisitions will happen more frequently.
UBS notes that after Trump’s victory in 2016, financial stocks soared. Thus, they could respond in a similar way this time. In addition, sectors tied to economic cycles will outperform all others.
UBS is convinced that US economic success depends on global economic growth and how quickly China’s economy can recover. Countries with high operational efficiency, significant trade surpluses with the US, and substantial trade volumes with China such as South Korea, Germany, and Japan will be the most vulnerable to looming import tariff hikes. On the other hand, India and the UK may sigh with relief as they face fewer risks.
Interestingly, no matter if Trump makes a triumphant return, the US budget deficit could exceed 7% of GDP as early as 2028, regardless of which party is in power.
The main highlight of Trump’s trade policy is the prompt approval of a bill on import tariffs. Proposed tariffs of 60% on goods from China and 10% on other imported goods will raise the average rate, reduce demand for imported goods, and contract the import flood. However, in the past, tariff hikes did not please the stock market, especially in export-oriented sectors.
