By Peter S. Kim
As we begin the year, global investors are facing many uncertainties in a world grappling with military conflicts, polarized politics and economic uncertainty. However, perhaps the most talked about risk is the incoming president of the United States. Among all the speculations regarding his second term, I propose four trends for investors to consider for the coming year.
First, Trumpism will endure beyond U.S. President Donald Trump. In other words, the lesson from Team Trump's latest election victory is that the political movement stems not from Trump as an individual, but from what he represents. The world assumed Trump's first term was a pure freakish accident never to be repeated. But Trump has made the unlikeliest of comebacks — and with an even bigger support base than the first time. Trumpism, to everyone's surprise, has turned out to be more potent than the personality that sparked the movement. It is also a mistake to think Trumpism is isolated to the U.S. A rise in nationalism and populist leaders is unmistakably spreading around the world; the popularity of strongman leadership seems infectious, as evidenced by recent events in South Korea.
Institutions established during the peak of the globalization era now face their toughest existential challenge. During his first term, Trump attacked institutions like the World Trade Organization, the Paris Accords, the North American Free Trade Agreement and the Trans-Pacific Partnership. After facing setbacks in achieving his goals, Trump is now aiming for even bigger targets. He may target larger institutions, not only as leverage in negotiations but also to cement his legacy, bolstered by the endorsement of his policies in the election results. As a result, institutions like the United States-Mexico-Canada Agreement, NATO and even the European Union could see Trump challenge the very foundations on which they were built.
Second, Trump's "America First" policy is driven by two main strategies: trade threats and fiscal stimulus. He leverages trade threats to secure concessions from other nations, aiming to stimulate U.S. economic growth at their expense. Team Trump justifies the threats as part of a zero-sum game, prioritizing U.S. interests by reclaiming concessions that, in many Americans' minds, the U.S. had historically given away too generously. However, in the long term, the U.S. could also suffer as the inflationary impact of tariff hikes eventually catches up, negatively affecting American consumers. Until then, though, the U.S. will benefit from a shift in the growth balance in its favor.
Also, by cutting rates and pushing for fiscal stimulus, the U.S. is now spending its future growth. In other words, by giving up fiscal prudence, the U.S. is sacrificing future fiscal and monetary policy bullets. While fiscal spending is a global trend, Trump's combination of tariff hikes, rate cuts and fiscal stimulus will eventually feed into inflation. More worryingly, by delaying or postponing the alternative energy initiatives, Trump is accelerating climate change. Jeopardizing the sustainability of future generations is the ultimate and tragic trade for instant gratification. Both pro-business policies are at the core of "U.S. exceptionalism," which Americans may applaud now but with dire consequences down the road. Trumpism is synonymous with short-termism and instant gratification, and it is worryingly seducing other parts of the world.
Third, the U.S. exceptionalism could transform into "Wall Street exceptionalism." Trump's core policy centered around pro-growth measures of interest rate cuts and tax cuts will require support from Congress to pass, and while the Republican Party holds a majority in both the Senate and the House, this does not guarantee smooth passage given the divisive presence of Trump even within his own party. However, Trump's one bipartisan policy is deregulation and financial market deregulation will likely see little opposition from either party. Judging by the lineup of senior posts littered with Wall Street figures, a financial market bubble seems to be in the making. A financial asset bubble could precede eventual inflation as Trump may decide to spend a phase of tariff threats and negotiation before actually raising tariffs. The good news is that U.S. financials is the center of global finance, and what's great for Wall Street is also good for global financial sectors. In that regard, the Korean financial sector led by Korean banks should also benefit, as they already saw solid price performance on the back of the Value-up Program.
Lastly, consensus is building that Trump's policy mix of rate cuts, tax cuts, tariffs and deregulation will lead to inflation in the U.S. The key question for investors is the timeline. I do not expect inflation to be a threat for 2025. Trump will enter office and continue to make outlandish threats before negotiating concessions from the U.S.' trading partners. But just to ensure that everyone knows he means business, Trump could kick off his term with massive tariffs on a few high-profile products — but only on items that are not meaningful components of the consumer price index basket. As much as the Trump administration wants to shock and unnerve its trading partners, fears of inflation coming early in his term will derail much of the policy leverage. Inflation, therefore, could be the only effective disciplinary mechanism to restrain Trump.
Another advantage that could stave off inflation for Trump is the strong U.S. dollar, which provides immediate price relief on imported goods for U.S. consumers. Unfortunately, economies outside of the U.S. could see various forms of inflation or deflation. Those adopting U.S.-style protectionism could gain short-term economic boosts but quickly see inflation transpire.
Trump has shown a penchant for exercising shock and fear onto the most ardent partners of the U.S. during his first term. There are no signs of that strategy changing. While the outlook for 2025 remains positive for U.S. stocks, those outside of the U.S. could be unpredictable events and volatility. For countries under deflationary forces like South Korea and China, a policy mix of protectionism and rash stimulus could lead to stagflation, which could have dire consequences.
Peter S. Kim is managing director at KB Securities. The views expressed in this article are his own.
English (United States) ·