THIS week’s inauguration of property mogul Donald Trump as the 45th President of the USA was a spectacle that few would have imagined possible when he entered the race in 2015. Widely expected to flounder in the early stages of the campaign, Trump’s rise under a pledge to “Make America Great Again” defied the sceptics. But with each step forward the markets got spooked: news interpreted as favourable for Trump was invariably greeted by falling share prices and a stampede into defensive assets such as gold.

Yet following the result, markets have flipped radically from fear over what Trump’s volatile personality and protectionist instincts could mean for the future, to an outbreak of bullishness over the impact on the US economy from his proposed aggressive tax cuts, infrastructure investment programme and reform of banking regulations. Since Trump’s victory the S&P 500 Index of leading US shares has surged six per cent, with UK investors also benefitting from a strengthening of the dollar.

Private investors appear to have caught the Trump bug too: net inflows into US equity funds by UK retail investors rocketed to £168 million in November, a sharp reversal from the previous month when the sector saw an outflow of £224m.

While the precise details of which Trump promises will end up being enacted remain unclear, there is little doubt that US policy is going to change dramatically. US interest rates are on a rising path again and the new administration is clearly willing to adopt an aggressive approach to fiscal stimulus through deep tax cuts and plans to encourage investment in America’s creaking roads, bridges and energy sectors.

While this could prove very positive for the US economy, there are risks from rising inflation and a potential ballooning of the US deficit. It also seems evident that the high point for globalisation has now passed, with Trump advocating an America first approach. Trump talks – or rather tweets - of slapping import tariffs on China, Mexico and even German cars as well as threatening to tear up trade agreements.

At the moment, markets are focused on the potential upsides rather than the risks of this radically changing landscape and all that it implies for inflation, supply chains, global trade and the US deficit. This new world opens up the prospect of significant differences between the winners and losers from these seismic shifts in policy. This, laced with the prospect of Twitter-led diplomacy, creates the prospect for high levels of future volatility as well as much greater dispersion in returns between stocks and sectors.

The truth is that no one knows for sure how this could all go for the US, but the bigger risks probably sit with some of the emerging markets. Important trade with the US could be under threat and the rising dollar is already pushing up the costs of all the dollar debt they have insatiably issued since the financial crisis. It is very hard to see a bullish investment case for China in the world according to The Donald.

The US should certainly be a key market for long-term investors as it represents 53 per cent of the global stock markets and is home to many world-leading businesses. But those tempted to jump on the bandwagon of current euphoria should think carefully. A lot of optimism is factored into US share prices, which on most measures are very expensive and let’s not forget that when the pound is trading at such a weak exchange rate versus the dollar, piling into US shares carries currency risk as well.

For those inclined to invest in the US, the popular approach of doing so through a low-cost index tracker may not be the no brainer it has been in the past. Instead, investors might consider funds with a greater focus on attractively valued shares such as the Dodge & Cox Worldwide US Equity fund, managed from San Francisco, or the PowerShares FTSE RAFI US 1000 Exchange Traded Fund, which owns the 1,000 largest US companies but weights them according to a combination of how attractively valued they are, cash flows, sales and dividends. But for those who are convinced the new president really will make the American economy great again, then arguably the best way to invest in domestic US firms rather than its international giants is through a smaller company fund such as T Rowe Price US Smaller Companies Equity.

Jason Hollands is managing director of Tilney Bestinvest.