Winds of change. The shifting winds of geopolitics and monetary policies have triggered a drastic realignment within the US portfolio positioning. With a clear, decisive victory for Trump at the presidential election and an impending red trifecta at Capitol Hill, investors wasted no time in positioning for “Trump trades” – sectors or industries that could benefit from policy change that comes with the new administration. As we have highlighted in the asset allocation chapter, our base case assumptions for US policies are:

• Phase I – Tax Cuts: As the new administration moves swiftly to fulfil its campaignpromise on taxation cuts, it will result in tailwinds for domestic consumption andstrong corporate profitability. The downside of such fiscal largesse, however, is thestrain that will be inflicted on the US fiscal position, inevitably leading to higher bondyields and a stronger dollar.
• Phase II – Rising Trade Tensions: Trump has made tariff hikes a core feature of hiscampaign rhetoric; do expect this to be implemented in some shape or form as theRepublicans seek new avenues to fund their taxation cuts. The appointments of China hawks (Marco Rubio and Mike Waltz) to his cabinet will ensure a rocky road ofdiplomacy between the US and China in the coming years. Downside pressure onbond yields is to be expected should trade tensions between the superpowersescalate significantly – just as we have seen in Trump’s first presidency.

US exceptionalism – the only game in town. US equities remain the only game in town within the developed markets space, and investors’ portfolio positioning reflect that. Based on fund flow data from EPFR Global, USD6bn has entered US equity funds on a QTD basis (as of 6 Nov) as opposed to outflows for Europe and Japan. The robust flow momentum underscores investors’ confidence in the US economic and earnings outlook:

• Economic Momentum: The US economy continues to power ahead, underpinned bystrong momentum in AI-related capex and resilient domestic consumption. ISMServices remain expansionary at 56.0 in Oct 2024 (compared to 51.6 for Europe and49.7 for Japan) and this momentum is expected to persist in 2025 with consensusforecast expecting real GDP growth of 1.9% for the US (vs 1.2% for both the Eurozone and Japan).
• Corporate Earnings: Based on consensus forecast, US equities is expected to register earnings growth of 12.7% in 2025, driven by strong growth momentum in technologyas AI-related investments gather steam. In contrast, the earnings growth outlook forEurope and Japan are more muted at 6.4% and 0.2% respectively.

At this juncture, negative impact from a potential trade war has yet to be fully factored into analysts’ forecasts given the lack of clarity. However, should Trump’s tariff threats turn into reality, Europe is expected to suffer the brunt of the damage given a double whammy of tariff hikes on its US-bound exports and the influx of China goods that are being redirected from the US into the European market. Japan – an export-oriented country – will not go unscathed either with the US accounting for the lion’s share of its exports at c.22%.

Beneficiaries of Trump 2.0. To revitalise domestic manufacturing and create new job opportunities, Trump has spoken extensively on his plans for tax cuts and deregulation during the election. The geared beneficiaries of Trump’s expansionary policies are:

• US Financials – Deregulation propelling growth: Trump 2.0 is expected to emphasise a pro-business agenda and significantly reshape the regulatory landscape for US financials. Potential changes in regulations include the easing of capital requirements, which will allow banks to free up more resources for increased lending, hence generating higher profitability.
  Another area that may undergo deregulation is the M&A space which has been dormant of late thanks to the tight regulatory environment. M&A transactions have plunged since 2021 and this slump may reverse as the incoming Trump administration prefers a less stringent anti-trust stance and shorter approval timeframes.
• US Energy – “Drill, baby, drill”: Trump 2.0 is poised to provide significant tailwinds for the energy sector, particularly the fossil fuels companies, as driven by his pursuit of “energy dominance” for the United States. Trump’s “drill, baby, drill” mantra underscores his commitment to boost domestic oil and gas production, with the implications being: 
  
  
  1. A potential rescission of environmental restrictions imposed by the Biden Administration, including the resumption of liquified natural gas (LNG) export authorisations to non-free trade agreement countries.
  2. A potential expedition of approvals for federal drilling permits and leases required for the production of oil and natural gases. The implementation of these initiatives will create a favourable operating environment for energy companies.
     
     The recent nomination of Chris Wright, CEO of Liberty Energy (one of the largest hydraulic fracturing companies), as the new Secretary of Energy highlights Trump’s commitment to enhancing fossil fuel production. This appointment will reinvigorate the fossil fuel sector given Wright’s advocacy for fossil fuels.
  
  
• US Consumer Discretionary – Beneficiary of tax cuts and changes to EV regulations: Consumer discretionary was one of the best performing sectors in 4Q24, underpinned by robust consumer spending and easing inflation. With rising disposable income and stronger consumer purchasing power, the demand for e-commerce, luxury goods, and autos were boosted across the board.
  
  Within the consumer discretionary index, Tesla has emerged as one of the biggest beneficiaries of Trump’s re-election given the latter’s campaign promise on eliminating EV tax credits, which currently provide up to USD 7,500 in incentives for EV buyers. This policy change could potentially reduce US EV demand by c.27% and put pressure on less profitable EV players. Tesla, being the industry leader, is poised to benefit and this will have significant impact on the consumer discretionary space given Tesla’s weight within the index.
  
  Trump’s pledge to expand the Tax Cuts and Jobs Act (TCJA) across all income levels will also boost US domestic consumption and drive the consumer discretionary space.

1Q25 US Sector Strategy – Positioning for Trump 2.0

Sectoral rotation to ride Trump 2.0. The incoming Trump Administration is expected to bring about deregulation and expansionary policies which translate to higher bonds yields and increased dollar strength. This warrants some tactical switches to our US sector allocation and the key changes for the quarter are:

• Upgrade financials to Overweight: Financials are poised to benefit from lower taxation and deregulation. The rebound in bond yield (as result of expansionary Trump policies) will also enhance the net interest margins for banks.
• Upgrade industrials to Neutral: Trump’s policies to boost US domestic manufacturing will underpin momentum for industrials. Industries that may benefit include transportation and capital goods.
• Upgrade consumer discretionary to Neutral: Trump’s tax cuts will generate wealth effects and boost consumer spending. This is positive for consumption plays in consumer discretionary.
• Downgrade real estate to Underweight: Higher bond yields are negative for real estate from a valuation and rental yield perspective. Besides, the commercial real estate space is in doldrums and will remain a lingering headwind.
• Downgrade utilities to Underweight: Utilities companies are usually positioned as a dividend play and high bond yields will diminish its attractiveness.