It will take some time for the dust to settle following the US election. The US equity market responded positively, but US government bond yields rose.

A few of Trump’s policies, if implemented, are likely to be inflationary (in stark contrast to his promises to voters). Chief of these are the tariffs that he has said he wants to impose on all imported goods – European goods would attract a 20% tariff, for example, but for China the figure proposed is 60%. That spells bad news for exporters and seems likely to weigh on global economic growth.

Concerns about US inflation seem likely to keep interest rates higher for longer, which was one of the reasons that the US dollar rose in the wake of the Republican victory. That seems likely to bring Trump into conflict with the US Federal Reserve and its current chair Jay Powell. Any perceived watering down of the Fed’s independence would add to bond investors’ concerns.

In addition, there is some doubt about whether Trump’s promised tax cuts will be matched by his promised equally large cuts to Federal spending, and the prospect of significant debt issuance plus the increased cost of servicing US government debt is also worrying markets. At the extreme, there are fears of a sizable spike in yields at some point as investors baulk at supporting new debt issuance.

If the net of all this is higher for longer inflation and interest rates, that spells bad news for some interest rate-sensitive sectors, such as real estate and utilities, but it could be good news for financials and banks in particular.

Within our sector, the best way to play this would be through Polar Capital Global Financials (PCFT ).

I last wrote about the trust back in June 2023 and concluded by saying that the long-term picture for looked better than it had in a while. At the time, PCFT was trading on a discount of about 10.7% and a share price in the mid-130s. Ahead of the election, the share price rose to 180p, but in the wake of Trump’s decisive win, the share price has hit 188p and the discount narrowed to 4.7%.

Its managers think it could have a lot further to go. Writing in October, Tom Dorner said that investors, scarred by the experience of the financial crisis, were still fearful of financials and that meant that these stocks were still undervalued. Higher rates have created an opportunity to widen lending margins for banks, but other parts of the sector have been flourishing too as insurance premiums have been rising, alternative asset managers have been growing assets under management, volumes of electronic payments have grown, and innovation drives efficiencies and growth of new markets.

The US financial sector also seems likely to benefit from a bonfire of regulations (one of the reasons why the Bitcoin price hit a new high). While we should all be concerned about the wave of scams that this will probably engender, it will also remove the shackles from legitimate financial businesses too.

Regulations introduced in the wake of the global financial crisis mean that banks’ balance sheets are much stronger than they were going into it. New Basel III rules were set to raise reserve requirements again. Jamie Dimon, chief executive of JPMorgan (PCFT’s biggest position at the end of September 2024), has been a leading critic of the regulator. Some progress was achieved recently when the Fed watered down its plans to hike the amount of capital that the big US banks have to hold.

Now, the reserve requirements could be cut again. That could translate into a period of much higher returns of capital to shareholders through dividends and share buybacks, and this would also likely be accompanied by a boom in lending.

Pershing Square Holdings (PSH ), whose manager Bill Ackman was a vocal supporter of the Trump campaign, could also be a beneficiary of the new administration. PSH has stakes in Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), entities that provide mortgage finance in the US and that got into trouble and had to be rescued in the financial crisis. The two are still under conservatorship but have been trading profitably and building reserves. Trump has talked about these businesses exiting from conservatorship, which would provide a boost to the trust’s net asset value.

An environment of higher interest rates also rekindled interest in bond funds. Trusts such as TwentyFour Select Monthly Income (SMIF ), CQS New City High Yield (NCYF ), and Invesco Bond Income Plus (BIPS ) have been amongst the largest issuers of stock in recent quarters. That seems likely to continue. In fact, I have been wondering whether we could even see initial public offers (IPO) of new debt funds next year.

In time, while an uptick in lending could support a surge in US growth, that probably translates into a return to boom and bust. One of the more remarkable aspects of the years since the global financial crisis has been that loan defaults have been much lower than usual. That could change, creating much better conditions for distressed debt investors, and perhaps the launch of new funds in that area, but we are not there yet.

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