What Trump's second term means for Aussie investors

The results are in, and Donald Trump is set to return to the White House.

If it was any other country, Australians, some 15,000 kilometers away, wouldn't even bat an eye about an election in a far-off land. How many people down the pub are talking about the upcoming elections in Romania?

Yet, the influence of the United States in global affairs is undeniable - and with Trump's policies likely to create waves, Australian investors might want to pay attention.

If his last administration is any indication, his return could have wide-ranging economic and financial effects on Australia. Here's what Aussie investors should to keep an eye on.

Trade policies and tariffs

There's good reason to wonder what's in store. A predictably unpredictable Trump without the political constraints of re-election and likely supported by a Republican congress could open a Pandora's box of economic consequences.

One of the most immediate concerns is Trump's stance on trade.

Trump's 'America First' policies include the potential expansion of tariffs, especially targeting China.

Shane Oliver, AMP's chief economist, warns such protectionist measures could have a global impact, with Australia being especially vulnerable as an open, trade-dependent economy.

The Organisation for Economic Cooperation and Development (OECD) estimates that a 10% reduction in trade between major economies could slash Australia's GDP by 1.2%.

For Australian companies, particularly resource and agricultural exports to China, this could mean challenges in supply chains and access to critical goods, leading to potential increases in import prices.

In 2018, Trump's tariffs saw the Australian dollar (AUD) drop around 10%.

Should tariffs be reintroduced, a similar impact on the Aussie dollar could occur, raising import costs and affecting businesses and consumers alike.

However, Australia's direct trade exposure to the US remains limited at only 4% of total exports. Oliver points out that Australia could avoid the brunt of American tariffs because of its trade deficit with the country.

Still, the broader ripple effects could be felt across multiple sectors.

Inflationary pressures and economic policy

Trump's economic plans, which include tax cuts, increased spending, and tariffs, have many economists concerned about potential inflationary impacts.

Oliver notes that inflation in the United States could lead to increased interest rates globally, potentially putting pressure on the Reserve Bank of Australia (RBA) to respond with higher rates domestically.

Higher rates would affect borrowing costs, including mortgages and business loans, impacting consumers' budgets and corporate growth alike.

"This is a risk, but I suspect it would be offset by the growth dampening impact of an intensified global trade war."

Crucially, the Federal Reserve, the central bank of America, still made a 25 basis-point cut to the key rate in its November meeting. However, its comments were lacking information about future cuts.

Additionally, Trump is considering extending the US corporate tax rate to 15% for domestic products, which is set to expire next year, far below the OECD average of 23.9%.

Congressional Budget Office estimates Trump's tax plan would cost US$4 trillion over the next decade and add $4.6 trillion to the US deficit.

A move like this could renew pressure on Australia to rethink its own 30% corporate tax rate, especially as companies look to base themselves in more tax-friendly jurisdictions.

Such a shift could impact the Australian stock market and competitive positioning for Aussie businesses.

Deregulation: Financials, cryptocurrency, and energy

Trump's presidency is likely to bring a rollback in financial regulations, with possible implications for Australian investors.

Sectors like US financial services and cryptocurrency could benefit from deregulation, with fewer restrictions potentially boosting profitability and innovation in these areas.

This appears likely given that Trump wants the US to be the "crypto capital of the planet".

Given the global reach of crypto markets, Aussie investors with stakes in Bitcoin or Ethereum might see more trading volume and increased value in these assets.

After the election results, Bitcoin spiked 10% to reach a new high of A$114,834. However, crypto remains volatile, and policy changes can introduce both opportunities and risks.

Trump's stance on climate policy could also impact investment trends.

As he pushes for more domestic oil and gas production, investments in green energy may face headwinds, particularly for ETFs and funds focused on environmental, social, and governance (ESG) themes.

Conversely, traditional energy stocks could see gains under a US administration that prioritises fossil fuels. Since the US and Australian energy sectors are closely correlated, there could be opportunities domestically, even if it is at the expense of the environment.

Market volatility and currency fluctuations

The US election alone has historically brought increased market volatility, and Trump's re-election is proving no different. US stocks saw their best day since 2022, with banking and energy leading the charge.

While tech stocks were more mixed, it's likely that most of the day's price action was driven by momentum trades, rather than ones based on fundamentals, says Samy Sriram, market analyst at online investment platform, Stake.

"Tesla was the most traded stock on Stake over the last 24 hours -up by 500% from the day prior - but there's an equal number buys and sells, suggesting that the jury is still out on the company's prospects," says Sriram.

Currency markets are another area where Australian investors should keep watch.

During Trump's 2016 win, the US dollar appreciated sharply on expectations of fiscal stimulus and infrastructure spending.

A similar pattern could occur now, with the US dollar potentially strengthening in a high tariff environment.

A stronger USD could weaken the AUD which would affect the buying power of Australians abroad and potentially benefit export-driven sectors. Some experts say it could weaken other currencies too, such as the Euro and Japan's Yen.

Investor strategies

Given the uncertainties of a second Trump presidency, here are some strategies Australian investors might consider:

Diversification: A volatile market brings with it high risk but high reward. For those thinking about the long-term, spreading investments across various sectors, asset classes, and even geographies could help mitigate risks associated with market volatility.

Thematic investing: Exchange traded funds (ETFs) centred on certain themes may offer gains if Trump's policies favour these sectors. With Trump set to scale back green energy policies in exchange for domestic gas and oil production, ethical or green ETFs may suffer as a result. Conversely, ETFs with thematic elements around financial services could benefit from less regulation while defence stocks could rise or fall depending on US foreign policy.

Monitor currency exposure: Investors may want to hedge against currency risk if they have significant exposure to international markets, particularly in markets weakened (or strengthened) by trade wars and tariffs.

Staying informed: Following developments in policies, tariffs, and economic shifts can help investors make proactive adjustments to their portfolios.

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