Macro & Strategy - December 2024

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Back in Black: The Trump Election and Market Dynamics

The U.S. election is now in the books, and the convincing Republican win means the political and economic landscape is set to undergo a seismic shift.

With Donald Trump’s return to the presidency after a decisive victory – he won all swing states and secured the popular vote – the administration is set to implement a policy agenda that could reshape the U.S. and global economic landscape. After campaigning on promises of tax reform, deregulation, and aggressive trade policy, Presidentelect Trump has wasted no time in November in nominating policy hawks for major roles in his administration, hinting that his economic agenda is likely to be implemented swiftly and forcefully.

Trump’s Economic Agenda

Tax Policy and Growth Expectations

At the core of the Trump administration’s economic strategy lies yet another corporate tax reform agenda.

Even though President Trump slashed the corporate tax rate in his first mandate (from an elevated 35% to a competitive 21%), corporate tax rates are expected to drop even further, to 15%, a move designed to stimulate investment and to incentivize onshoring of manufacturing. The cuts would benefit primarily mid-sized and smaller businesses with limited international tax optimization capabilities, potentially supporting U.S. economic growth by boosting employment and consumer demand.

The tax cuts are expected to amplify GDP growth but will also pose risks to fiscal deficits. Estimates suggest that the cuts could increase the alreadyinflated federal deficit by $1 trillion over the next decade, assuming no offsetting spending reductions. Such fiscal expansion raises questions about sustainability, given the Congressional Budget Office’s alarming debt projections, which don’t include the potential impacts of the new administration’s policies.

Trade Policy Reset: Targeting China and Europe

The administration’s trade focus is set to upend the market’s dynamics. China remains a primary target, with accusations of intellectual property theft and market manipulation. New tariffs or export controls could pressure China into negotiations but risk reigniting global trade tensions.

Europe, specifically the automotive sector, is also in the administration’s crosshairs. As a result of U.S.-EU trade negotiations, European nations could increase their imports of U.S. goods – especially energy and agricultural products – shifting the trade balance in America’s favour.

The U.S. is also likely to rally Western allies to create a coordinated front against China’s growing economic influence, marking a potential paradigm shift in global trade relations. The outlook on trade is muddied, for sure, and remains the main source of uncertainty for investors.

Downsizing Government and Deregulation

In parallel with tax reforms, the Trump administration is expected to intensify efforts to reduce government intervention across industries, such as by streamlining federal agencies, cutting compliance costs for businesses, and prioritizing energy independence. The reduced regulatory burden could boost productivity in the energy, finance, and manufacturing sectors, but critics argue it might exacerbate environmental and social risks.

Canada’s Unique Position

Resilience under USMCA

Canada remains well insulated from the more disruptive aspects of Trump’s trade agenda owing to the safeguards built into the United States-MexicoCanada Agreement (USMCA). Key provisions, such as the exemption of Canadian auto exports from Section 232 tariffs, provide a significant advantage relative to Europe and Asia.

Lessons from 2018: The USMCA Negotiation Legacy

Readers will recall that the 2018 USMCA negotiation covered a broad set of items that are unlikely to be renegotiated. As a reminder, the following major points were addressed then and are unlikely to be revisited meaningfully:

Automotive Rules of Origin: Increase the percentage of North American-made parts in cars to qualify for zero tariffs and require a certain percentage of vehicle content to be made by workers earning at least $16 an hour.

Intellectual Property Protections: Strengthen protections for patents and trademarks, including biologic drugs.

Dispute Resolution Mechanisms: Maintain the Chapter 19 dispute-resolution mechanism for antidumping and countervailing duties and introduce new mechanisms for resolving disputes related to labour and environmental standards.

Sunset Clause: Implement a 16-year sunset clause with a review every six years to potentially extend the agreement.

Currency Manipulation: Include provisions to prevent currency manipulation and to ensure transparency in exchange-rate policies.

Agricultural Trade: Improve market access for U.S. agricultural products, including poultry, eggs, and wine.

The one item that could resurface sooner rather than later is dairy market access; Canada might be asked for further concessions on access by U.S. firms to the Canadian dairy market.

During the renegotiation period, Canadian equities experienced heightened volatility, particularly in export-heavy industries, such as energy and materials, which rely on the privileged relationship with our North American neighbours. Industrials and the auto sector, in particular, experienced bouts of pressure owing to the uncertainty surrounding tariffs, as well as the temporary imposition of tariffs of 25% on Canadian steel and 10% on Canadian aluminum.

Throughout 2018, the Bank of Canada continued to raise its leading rate cautiously, balancing domestic conditions with the risks posed by U.S. trade policy. The Canadian dollar remained under pressure into mid-2019, before eventually rallying when progress was made on the negotiations.

This history underscores the importance of stable trade agreements, which can shield smaller economies, such as Canada’s, from external shocks. USD/CAD pricing, which became a proxy for trade sentiment during 2018, is likely to play a similar role in the current environment.

Opportunities for Canadian Businesses

With the U.S. pushing for a rebalanced trade regime, Canadian exporters – especially in natural resources and agriculture – stand to benefit from some of the measures proposed by the new Trump administration. Whether through deregulation or stimulative measures that will boost demand from U.S. consumers, we see some compelling themes emerging.

For example, we expect the Trump administration to enhance oil and gas production, as well as provide easier permitting for pipelines, meaning Canadian energy companies can benefit from increased demand.

Moreover, with the coming reduction in subsidies related to climate change, and a potential downsizing of the Inflation Reduction Act, Canada’s own subsidy program could become relatively more advantageous for foreign investments in clean energy.

Canada will also face ever-rising pressure to step up its spending on defense and security, making Canadian defense and security firms more attractive if the defense budget increases.

Finally, despite the prospect of new trade barriers, there may be opportunities to negotiate exemptions or favourable terms for some agricultural products. Canadian agricultural firms could benefit by specializing in high-demand products and negotiate terms to maintain or to increase their market share in the United States.

In a nutshell, the outcome of the November 5 election creates uncertainty but also plenty of opportunities.

Implications for the U.S. Stock Market

Looking more squarely at the U.S. stock market, we can identify some clear winners of potential deregulation and tax cuts.

U.S. Financials and Banks: The financial sector will benefit from loosened regulations, particularly in capital markets and lending requirements. Expectations of increased mergers and acquisitions further bolster the outlook.

Energy Sector: Deregulation, coupled with policies favouring traditional energy sources, is expected to raise demand for fossil fuels. Simplified permitting for pipelines and reduced incentives for electric vehicles could push oil prices higher, benefiting upstream producers.

Small and Mid Caps: Companies with primarily domestic operations are poised to gain from tax-rate reductions and simplified compliance frameworks.

Even though small caps are expected to benefit from reduced taxes and tariffs, concerns over rising interest rates, profitability, and inflationary pressures may limit their performance in relation to larger peers. We recommend that investors focus on small caps with robust balance sheets and exposure to deregulated industries.

Potential Risks

Although we have focused on the opportunities up to this point, we acknowledge that the Trump administration’s policies are not without risks. An overly aggressive trade stance could disrupt global supply chains, harming sectors reliant on international components. The complexities of imposing broad tariffs are not lost on entrepreneurs, and the risks of retaliation are high.

We firmly believe that the end goal of the Trump administration on tariffs is to strike new trade deals that will strengthen the commercial stance of the U.S. economy. But achieving this target is not guaranteed, and we can clearly see that China, Europe, or other major trade partners could stand firm, far into Trump’s coming term. In such a scenario, the impact on global inflation and growth could force central banks to tighten monetary policy again and push the global economy into a recession. Even though this outcome is an alternative scenario for now, it deserves consideration.

What about the loonie?

Despite hitting a low of $1.40 for the first time in four years, and the first time since 2000 against a non-crisis backdrop, the loonie has shown relative strength versus the other G7 currencies.

As the economic tailwind from the Bank of Canada’s rate cuts becomes clearer, we think the loonie could offer attractive prospects in 2025.

One compelling trade idea is to go long the Canadian dollar (CAD) against the euro (EUR). Europe faces a host of structural and cyclical challenges, including demographic decline, low productivity, and a lack of fiscal unity. These issues are compounded by potential exposure to U.S. tariffs, particularly in the automotive sector.

Canada, in contrast, benefits from a robust trade agreement, a stable fiscal position, and strong commodity exports. Protection under the USMCA further strengthens Canada’s position, making this trade an attractive opportunity with a favourable riskreward profile.

Conclusion

Trump’s return heralds a transformative period for the global economy and markets. His administration’s policies will most likely foster growth in some sectors while creating volatility in others. For investors, the key lies in understanding the interplay between fiscal expansion, deregulation, and trade-policy shifts.

But one thing is sure: any paradigm shift opens up attractive opportunities for macro investors and stock pickers.

Monthly positioning

In terms of portfolio positioning, we continue to prefer equities over cash and bonds, with a particular focus on Canadian and U.S. equities. Canadian equity valuations are attractive in relation to other global markets, Canadian growth appears to be improving, and the Bank of Canada has maintained an easing stance. Historically, these factors are positive for equity returns. In the United States, we continue to see the earnings outlook as favourable, despite more demanding valuations.

The coming deregulation policies from the Trump administration are positive for the earnings outlook of large swathes of the equity market and, even though they have begun to be priced in, we think there is more to come as we head into 2025. Over all, this context creates a favourable backdrop for equity markets; thus, we think this positive trend has some room to run.

Over the medium term, we continue to think the higher yields on fixed income can provide effective hedging for an equity-centric portfolio. That being said, more tactically, the resilience of U.S. growth and the encouraging signs of improvement in Canadian growth, lead us to a more cautious view. Even though Trump has selected a Treasury Secretary who appears to be more orthodox in his fiscal views, there is a risk that the deficit will expand, requiring additional Treasury issuance that the market may struggle to digest, especially in a context where growth is strong and inflation runs slightly above target. In this context, although we will be considering opportunistic increases in our allocation to fixed income in 2025, we are positioned more cautiously in this asset class on both sides of the border.

In commodities, we closed our long gold position, which had been very successful in 2024 as gold prices rallied strongly, and initiated a small short position because we think the short-term dynamics for this asset have changed significantly. With Trump’s election and the potential for negotiations between Russia and Ukraine, investors may have fewer reasons to hold gold as a geopolitical hedge in the near term. The strong flows from emerging market central banks into gold may pause in the near term, which would remove a tailwind for the commodity. Lastly, the strong risk-on rally in the wake of the U.S. election could lead to flows out of gold and into equities, prompting other investors to take profits. We still view gold as strategically helpful in a portfolio over the long run but tactically we see some risks to the trade and have decided to reverse our positioning.