Implications for Credit Ratings Amid Policy Changes Under the New U.S. Administration

The inauguration of U.S. President Donald Trump in 2025 has sparked global interest and market speculation. “We see a significant degree of uncertainty in the markets, and indeed, 2025 could bring some surprises,” says Desiree Sauer, Investment Strategist at Lazard Asset Management. Sauer predicts that the economic gap between the U.S. and the rest of the world is likely to widen under the new administration, driven by a mix of tax reforms, deregulation, and protectionist measures.

Economic Effects of the New U.S. Administration

Trump’s administration is expected to push for an extension of the 2017 tax cuts, a move that could further bolster U.S. companies. Deregulation and reduced governmental oversight are likely to create a business-friendly environment, encouraging mergers and acquisitions. However, protectionist policies, such as new tariffs, pose risks. “Higher import costs could be passed on to consumers, potentially driving inflation,” Sauer explains. Yet, she suggests that the inflationary effects might remain limited due to the U.S.’s relative economic self-sufficiency and a lack of secondary effects like wage increases. Planned tax relief for households could offset some negative consequences.

Another potential downside is tied to immigration policy. “Mass deportations could have both social and economic consequences. A labor shortage could slow growth and drive up wages, increasing production costs,” warns Sauer.

“America First” and Global Impact

The “America First” agenda will likely intensify challenges for countries with high trade deficits, such as China and the Eurozone. “The U.S.’s lead over other regions is driven in part by its remarkable labor productivity,” notes Sauer. This trend, coupled with the administration’s trade policies, could widen the economic gap further.

For the Eurozone, the implications are particularly concerning. U.S. trade measures could exacerbate existing competitive challenges, especially for countries like Germany. “Germany faces increasing pressure from Chinese firms offering lower-cost products in key sectors such as automotive and green technologies,” Sauer explains. While rising real wages could boost domestic demand, these gains might not fully counteract the negative effects of tariffs.

Currency effects could play a moderating role. A stronger U.S. dollar could offset some tariff increases by making imports cheaper. However, the Eurozone also faces geopolitical risks, including the ongoing Ukraine conflict. Should the U.S. withdraw some support, the Eurozone may bear a greater burden, adding economic strain.

China: Vulnerability to U.S. Policy

China is poised to feel the brunt of U.S. protectionist policies. Although its economy has shown signs of recovery, challenges from the real estate sector and trade conflicts persist. “China is increasingly reliant on exports to sustain growth due to weak domestic consumption,” says Sauer. “While the U.S. accounts for only 15% of China’s exports, it remains their largest single trade partner, making China economically vulnerable to tariffs.”

In response, China could impose retaliatory tariffs or restrict exports of critical raw materials, potentially disrupting U.S. supply chains. Another possible measure is the devaluation of the yuan to maintain export competitiveness.

Investment Strategies Amid Political Uncertainty

From a capital markets perspective, declining inflation globally offers room for interest rate cuts, benefiting markets overall. However, the policies of the new U.S. administration introduce uncertainties requiring a nuanced investment outlook.

“U.S. equities remain attractive despite high valuations,” Sauer notes. She highlights small-cap stocks as particularly promising due to their domestic focus, which shields them from tariff-related risks. Convertible bonds issued by mid-cap growth companies may also present opportunities.

On the other hand, European and emerging market equities face greater challenges. Uncertainty around U.S. policies and tariff pressures weigh heavily on these markets. “A strong U.S. dollar could be particularly detrimental to emerging markets, where many companies carry debt in dollars,” warns Sauer. Additionally, rising U.S. yields may trigger capital outflows from emerging markets.

Fixed Income: Opportunities and Risks

In the Eurozone, falling interest rates could benefit fixed-income securities as the European Central Bank may adopt a more accommodative stance to counter demand shocks caused by tariffs. “European fixed-income assets are well-positioned to benefit from lower rates, though the weaker economic outlook could pressure corporate bonds,” says Sauer.

Scandinavian bonds stand out as a bright spot. “Both investment-grade and high-yield Scandinavian bonds offer attractive yields and stable economic backdrops. Active management will be critical,” Sauer emphasizes.

Conclusion

The new U.S. administration presents a mixed bag of opportunities and risks. While U.S. economic policies, such as tax cuts and deregulation, could support growth, protectionism and geopolitical tensions pose challenges for other regions. “For investors, a differentiated approach is key. U.S. small caps remain appealing, while selective opportunities exist in European and Scandinavian fixed-income markets,” Sauer concludes.

Credit ratings will likely be influenced by how these policies affect global economic stability, with potential downgrades for regions or industries most impacted by trade restrictions and geopolitical shifts. Meanwhile, the resilience of U.S. companies and markets could solidify the country’s position as a credit leader, albeit at the expense of widening global economic disparities.