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

A few of president-elect Donald Trump’s policies, if implemented, are likely to be inflationary, in stark contrast to his promises to voters to tackle the cost of living. Chief among these are the tariffs he wants to impose on all imported goods. European goods would attract a 20% tariff, but the figure proposed for China is 60%. That spells bad news for exporters and could weigh on global economic growth.

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

In addition, there is some doubt over whether Trump’s promised tax cuts will be matched by his promised equally large cuts to Federal spending. 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, in particular, banks.

In the investment company sector, the best way to play this could be through Polar Capital Global Financials (PCFT ).

I last wrote about the trust in June 2023 and concluded that the long-term picture 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 of about 135p. Ahead of the election, the share price rose to 180p, but in the wake of Trump’s decisive win has hit 190p, and the discount has narrowed to 4.7%.

Its managers think it could have a lot further to go. Writing in October, Tom Dorner said investors, scarred by the financial crisis, were still fearful of financials, which meant 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). We should all be concerned about the wave of scams this will probably engender but it will also remove the shackles from legitimate financial businesses too.

Regulations introduced in the wake of the global financial crisis mean 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, CEO of JP Morgan (PCFT’s biggest position at the end of September), 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 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.

Other beneficiaries

Pershing Square Holdings, whose fund manager Bill Ackman was a vocal supporter of Trump, 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 government control, or conservatorship, but have been trading profitably and building reserves. Trump has talked about these businesses exiting from state ownership, which would provide a boost to the investment company’s net asset value.

An environment of higher interest rates also rekindled interest in bond funds. Trusts including TwentyFour Select Monthly Income (SMIF ), CQS New City High Yield (NCYF ) and Invesco Bond Income Plus (BIPS ) have been among 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 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.

James Carthew is head of research at QuotedData.

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