Zhongjin: What does Trump 2.0 mean for the world?

CICC released a research report stating that the "Republican ace" situation of Trump + the Republican Party controlling both houses significantly strengthens the possibility of major policy advancement by Trump. In the Trump 2.0 era, changes in core US policies may boost growth and inflation expectations domestically, but Trump's most iconic aggressive tariff policy is unfavorable for trading partners. In the long term, this is favorable for risk assets and US dollar assets, while short-term over-extension, policy delays, and reversals may provide trading opportunities to do the opposite. For China, the impact of the US election results is more directly related to the pressure of high tariffs, increasing the necessity for external disturbance policy hedging; for global trade, a potential replay of the "Reagan Big Cycle" may disrupt global trade. Key points of CICC are as follows: As of 6:00 am Beijing time on November 7th, the Associated Press has announced that Trump has won the presidential election with 295 electoral votes (traditionally, the winner is announced by the Associated Press based on vote counting and forecasting), and is likely to be elected as the new President of the United States. At the same time, the results of the congressional elections are also clear, with the Republicans controlling the Senate with 52 votes and leading in the House with 203 votes (vs. 189 votes for the Democrats), increasing the likelihood of "Republican ace." As the results of the vote counting in various states continue to emerge, various asset classes have already reflected the "Trump trade," with US bond yields quickly rising above 4.4%, the US dollar and Bitcoin strengthening, the Mexican peso and Vietnamese dong weakening, and Hong Kong stocks falling. I. Policy changes: Seven core propositions, tax cuts domestically + tax increases externally, increased stimulus, immigration control, old energy, weak US dollar Compared to the current divided Congress with the Biden Democratic government and the Republicans controlling the House, the "Republican ace" situation of Trump + the Republican Party controlling both houses significantly strengthens the possibility of major policy advancement by Trump. The core policy changes are reflected in the following aspects: 1) Tax cuts domestically: Most individual income tax provisions of the "2017 Tax Cuts and Jobs Act" will expire in January 2026. Trump advocates extending the term of tax cuts for individuals, even pushing for the permanentization of tax reform laws, and further lowering the corporate tax rate from 21% to 15%. Tax cuts are expected to boost corporate profits (although the magnitude is not comparable to the 2017 tax cuts), benefiting US stocks, especially the cyclical sectors with currently high effective tax rates. 2) Tax increases externally: Overall imposition of 10% tariffs and 60% tariffs on China, and indicating that industries such as new energy may face 100% tariffs, which is unfavorable for major trading partners subject to tariff increases. 3) Increased stimulus: Increased infrastructure investment can be achieved by reallocating unused funds from the "Inflation Reduction Act" and the "Bipartisan Infrastructure Act" to areas such as "roads, bridges, dams"; supporting the development of the AI industry, or repealing the Biden administration's regulation of the AI sector. This is positive for the US dollar, cyclical sectors, and some tech stocks, and negative for US bonds and gold. 4) Immigration control: Trump advocates continuing to tighten immigration policies, but may relax requirements for "high-level" talent, and may issue executive orders to tighten border policies, including but not limited to deportations. 5) Return to old energy: Will expedite the issuance of permits for oil and natural gas exploration, increase domestic oil supply; reduce subsidies for new energy, which is unfavorable for some new energy demands. 6) Support for cryptocurrencies: May repeal Democratic regulations on cryptocurrencies. 7) "Weak US dollar" policy: Trump hopes to weaken the US dollar to reduce the US trade deficit, relying on actively and significantly devaluing the dollar to attract manufacturing back. It is worth noting that compared to the more clear policy directions and impacts mentioned above, the market does not pay much attention to Trump's policy of weakening the US dollar to boost US export competitiveness. This is because on the one hand, many other policies fundamentally support a stronger US dollar, and on the other hand, the market is not certain about the success of intervention. There are three reasons why this should be closely watched: 1) the market's expectations are inadequate, 2) the US Treasury has tools to intervene in the US dollar, 3) significant US dollar intervention weakening may also cause disruptions to global financial and trade conditions. Next, it is important to focus on whether former US Trade Representative Lighthizer will be appointed as the new Treasury Secretary. II. Macro implications: Boost growth and inflation expectations domestically, unfavorable for trading partners externally Domestically, after the current Federal Reserve rate cuts, as the US economy gradually emerges from a "soft landing" and with Trump's main policy proposals, combined with congressional support, the macro environment in the US is likely to be strengthened in terms of growth and inflation: on the one hand, expectations of tax cuts and larger stimulus are supportive for leverage in the private sector and expectations of expanded stimulus, which in itself supports both growth and inflation; on the other hand, potential changes in policies like tariffs and immigration that cause significant supply disruptions will also increase supply-side inflation pressure. The contradiction is that this combination of policies will both lead to expectations of increased stimulus and risk preference, as well as concerns about rising debt and inflation. The Tax Foundation predicts that Trump's tax cuts for residents and businesses may boost GDP growth by 2.4 percentage points over the next 10 years, but the tariff imposition policy may suppress GDP growth by 1.7 percentage points, with a comprehensive estimate of a net increase of 0.8 percentage points. The PIIE estimates that CPI may increase by 4-7 percentage points in the next 1-2 years due to the impact of tariffs on a baseline scenario of 1.9%. Therefore, the timing and extent of the advancement of Trump's different policies will be crucial. We lean towards the expectation of improved risk preference dominating in the short term; however, once the "freshness" wears off or policy advancement is blocked, the market may refocus on the disruptions and risks of inflation. Externally, Trump's most iconic aggressive tariff policy is disadvantageous for trading partners, including China, as well as Mexico and Vietnam, which are popular destinations for transshipment. This will increase trade and exchange rate pressures on these countries, but also increase the possibility of needing to increase domestic demand stimulus to counteract these pressures. III. Asset impact: Favorable for risk assets, favorable for the US dollar.Assets, but providing "opposite trade" opportunities after reaching a high.When analyzing the impact of the election results on assets, it is necessary to consider not only the medium to long-term effects of various policies, but also the extent to which various assets are expected to be included in the short term and the progress of policy implementation. In other words, in terms of long-term impact direction, the intermediate process will not and cannot only have one direction, and there may also be instances of short-term over-accumulation or temporary slowdown and reversal after policy implementation is delayed or obstructed. This was the case in the 2016 election, where after the results were announced in November, the "Trump trade" (U.S. dollar, U.S. bonds, U.S. stocks, copper) quickly surged, but gradually slowed down after January 2017, and only resumed an upward trend after the tax reform plan was passed in September. Therefore, during this period, it also provided "contrarian" trading opportunities. From the current perspective, assets that have already been priced in include gold, U.S. bond rates, the U.S. dollar, bitcoin, the Mexican peso, and the Chinese yuan, but copper, crude oil, and the Chinese export chain have been priced in to a lesser extent. This also means: 1) Overall, the Trump trade still has further room to rise and develop, "letting the bullets fly a little longer"; 2) Assets that have been underpriced or have not yet fully factored in Trump's policies need to be compensated to a greater extent; 3) Once prices rise to a certain level, such as U.S. bonds and the U.S. dollar, it will provide trading opportunities to go against the trend. Gold has been overpriced in expectations and is moving in the opposite direction of higher risks, therefore there is a risk of over-accumulation, as was the case in both the 2016 and 2020 elections. IV. China Impact: Increased external disturbances increase the need for policy hedging In addition to the short-term emotional impact mentioned above, the more direct impact of the results of the U.S. election on China comes from the pressure of high tariffs. The experience of 2018 provides information that can be referenced: 1) The timing depends on when the Section 301 investigation is initiated. In 2017, the Section 301 investigation was initiated in August, and the tariffs took effect in March 2018, but the tariffs were increased for products already on the list without going through the investigation and hearing process; 2) The final tariff rate can vary. In April 2017, Trump proposed a 45% tariff, but the final tariff implemented was only 25%. Considering that whether the 60% tariff will be fully implemented or not will have a greater impact internally and on U.S. inflation and growth, there is still a variable in whether it will be fully implemented; 3) Market impact is not entirely comparable. The internal pressure caused by financial deleveraging at the beginning of 2018 and the external pressure caused by trade frictions formed resonance, causing significant market disturbances. This time, there is no initial phase of deleveraging internally; 4) The direct impact on U.S. stocks is limited, with limited direct price impact combined with internal tax cuts, which led to continued strength in U.S. stocks until the fourth quarter of 2018. However, several differences between this round and 2018 make the pressure of tariffs cannot be ignored: 1) The issue of insufficient demand in real estate and some manufacturing industries, which makes China more dependent on external demand. (Net exports accounted for 23.8% of GDP in the first nine months of 2024 vs. 4.7% in 2017); 2) The use of exchange rates as a means to hedge against tariffs may be limited. From 2018 to 2019, the RMB depreciated by more than 11% against the U.S. dollar, approximately 6% against a basket of currencies, partially offsetting the negative impact of increased tariffs on exports. However, this time the external environment with the Fed's room for rate cuts and cooling expectations is different from mid-2019 when the Fed turned dovish, not to mention Trump's weak dollar policy, which may constrain some exchange rate measures as a hedge. 3) The focus of trade friction has also changed significantly. If 2018 still focused more on the trade deficit (the concentration of imports decreased, but the overall dependence did not decrease), after six years, supply chains and re-export trade have been continuously restructured and focused on during Biden's past four years, becoming the focus (concentration and dependence of imports both decreased). Just as four years ago, Biden "inherited" the 25% tariff from Trump, Trump may continue Biden's policies on the supply chain, which is also the reason for the recent depreciation of the Mexican and Vietnamese currencies and stock markets. The bank's static estimation shows that a 60% comprehensive tariff or a significant drag on exports and growth would require an exchange rate hike of 6-9% or a deficit rate increase of 1.5-2% to offset. In this sense, the current problem is that private sector credit contraction and slow government hedging efforts have led to an overall economic deleveraging. Therefore, some extent of external pressure may require a greater policy response, which may have a positive effect on boosting domestic demand and the market. For Chinese assets, the overall market and export chain have priced in Trump's victory to a lesser extent, and the short-term intensification of the "Trump trade" or increased market concerns about tariffs and volatility. However, expectations of stimulus may also increase, leading to a rebound in the market. In other words, under a "stress-induced" policy response function, greater external pressure may actually lead to a larger rebound, otherwise the market may continue to be characterized by volatility. Structurally, sectors with less external exposure such as technology growth, autonomous technology, and dividends may be better choices, while cyclical sectors depend on the extent of fiscal stimulus. V. Long-term Impact: A replay of the "Reagan Revolution"? From a longer-term perspective, the impact of this U.S. election may not be limited to boosting inflation expectations domestically and disrupting global trade externally. In fact, over the past three years, the major fiscal, technological, and global capital rebalancing caused by "occasional" factors such as the pandemic and the AI explosion have not only been the three "macro pillars" of a strong U.S. economy and strong U.S. stock performance, but have also been replicating the situation of the Reagan government from 1981 to 1985, where a cycle of "strong economy, strong currency, massive deficits, and huge trade imbalances" reinforced each other, known as the "Reagan Revolution." After the end of the stagflation in the 1970s, the Reagan government implemented tax cuts to stimulate domestic demand on the one hand, and significantly increased defense spending for the "Star Wars" arms race program on the other hand, leading to a significant expansion of deficits compared to the 1970s. From early 1981 to the Plaza Accord in 1985, the U.S. dollar appreciated significantly by 54%. The U.S. current account balance as a percentage of GDP also went from 0.15% in 1981 to negative and expanded to -2.87% in 1985. The financial account went from a net outflow in 1981 to a net inflow by 19 Overall, the impact of the U.S. election may have longer-term effects beyond just domestic inflation and global trade disruptions. The current economic situation may be echoing the dynamics of the Reagan administration in the 1980s, known as the "Reagan Revolution" with its strong economy, currency, deficits, and trade imbalances strengthening each other.In 1988, the United States saw the highest net inflow of 4.3 trillion US dollars, with strong economic growth and a strong US dollar leading to a bull market. This attracted funds to flow into the US to purchase financial assets, and even into bank deposits with high interest rates.This situation is not a stable state, as it increases the burden and unsustainability of the US debt, as well as the fragility of the global trading system, which subsequently led to the Plaza Accord and the significant devaluation of the US dollar against trading partners. However, before this, the "Reagan Great Loop" had a profound and drastic impact on global assets. In short, through large fiscal and capital inflows, it boosted US assets while also increasing pressure on other market assets.