What does the 'Trump Trade' look like for ASX investors?

Everyone is talking about the US election and what to buy in the event of a Trump win – who remains the betting favourite after President Joe Biden abandoned his re-election bid on Monday.

Trump accepted his party's presidential nomination on Friday, making his first public address since the assassination attempt. His speech focused on economic promises, including plans to reduce inflation, lower interest rates and decrease national debt. He reiterated tax cuts, a crackdown on illegal immigration and plans to gut funding for green projects.

Macquarie says investors looking to capitalise on a potential Trump victory should focus on stocks with high US earnings exposure. We'll highlight some of the key names below.

Trump's policies at a glance

Jefferies analysts pointed out potential policies that Trump could implement if he wins the upcoming election. These include:

1. Immigration and deportation: The analysts expect Trump to terminate benefits for undocumented immigrants and intensify deportation efforts

2. Trade and tariffs: Trump is expected to align US tariff rates with trading partners, which includes a 10% tariff across the board and up to 60% on China

3. Deregulation: In 2017, Trump signed four bills rolling back regulations he said were hurting the economy. He effectively wanted the removal of two existing regulations for every new one introduced

4. Energy: Trump's GOP presidential nomination speech reiterated promises to lower energy costs by drilling for more oil. He will likely repeal the EPA's EV standards, which currently mandates that 56% of new vehicle sales will be electric by 2032. He's also pledged to end EV tax credits

5. Drug pricing: Trump may pursue lowering drug prices and expanding domestic manufacturing

6. Foreign policy: His acceptance speech took aim at Biden's foreign policy and vowed to quickly end Russia's war on Ukraine

ASX performance during US elections

The market's performance around US presidential elections is heavily influenced by the economic cycle, especially post-election returns, according to Macquarie.

"The last 3 elections took place in expansions and US stocks rose >20% in the first year after the election," the analyst said.

"The current election takes place in a slowdown, and it's possible we could be in a downturn soon after the election. In slowdowns (or downturns), post election returns tend to be below the long term average."

The table below shows the average stock returns for the S&P 500 for elections since 1960.

Source: Macquarie Research, July 2024

And here's the average returns for the All Ords over the same time period.

Source: Macquarie Research, July 2024

"When investors think about Trump trades, we would keep this perspective in mind. Unless the winner of the election or Fed rate cuts lead to another "no landing", this slowdown turns into a downturn and this will drive equity volatility."

"We note that pre-election returns tend to be volatile in the 3 months leading into an election, with ASX price returns negative in 10 of 16 cases."

The ASX Trump Trade

Macquarie says the best Trump/election trade is to own stocks with high US earnings exposure. This thesis is based on the idea that:

• The US has a strong technology growth engine, which supports productivity and helps US companies to deliver stronger earnings growth and higher margins

• As concerns about another RBA rate hike subside, Macquarie expects the slowing US economic cycle to strengthen the US dollar. This scenario will have a positive effect on currency changes for export-oriented businesses

• If Trump does win the US election, he will likely pursue his "Make America Great Again" agenda through various means. While conventional wisdom is against tariffs, they could boost US investment, growth and lower inflation

The table below lists the ASX 300 stocks with more than 60% US revenue exposure. All of the below stocks have an Overweight rating except for Austal.

Source: Macquarie Research, July 2024