Last week in a nutshell
- Donald Trump won the presidential election, with an increased likelihood of a Republican clean sweep as his party may also win the House of Representatives.
- The US, UK, and Sweden cut interest rates despite uncertainties from Donald Trump’s election win.
- China extended a lifeline to local governments with the issuance of an extra $840bn in bonds over three years aiming to reduce systemic risks in its slowing economy.
- The uncomfortable German 3-way coalition collapsed, pulled apart by different visions on how to stimulate the country’s flagging economy.
What’s next?
- Markets will digest the US election result and its likely policy implications.
- In the euro zone, the estimated GDP growth rate as well as preliminary data on employment change will keep the focus on the region’s fundamentals.
- In the US, CPI, PPI and retail sales are due as well as speeches by Fed Chair Jerome Powell and several of the Fed members.
- The two-week COP 29 climate conference begins in Azerbaijan, focusing on a new climate finance deal for poorer nations, while President-elect Donald Trump plans to withdraw the US from the Paris accord.
Investment convictions
Core scenario
- The US economy is in a “sweet spot” as growth accelerates, inflation falls, the Federal Reserve eases and President-elect Donald Trump is expected to spend massively.
- Meanwhile, the rest of the world is concerned about geopolitics, potential higher trade tariffs with the US and growth. Economic growth in China needs additional support and it would also be welcome in the euro zone. The ECB rate cuts should be of help.
- Inflation is cooling at a similar pace among regions, but activity has shifted into a higher gear only in the US, while China at the far end of the spectrum remains in deflation.
Risks
- The return of Donald Trump to the White House brings the risk of significant tariff hikes, stricter immigration enforcement, and inflation rising above 4%, which may prompt the Federal Reserve to change its interest rate path, potentially leading to a recession by 2026. Over the coming days and weeks, two key variables to monitor will be US rates and the trajectory of the dollar.
- Beyond US equities, such policies, and new trade tariffs, would have a ripple effect on global markets.
- Geopolitical risks continue to pose a threat to global growth and energy prices, particularly with ongoing tensions in the Middle East and the war in Ukraine.
Cross asset strategy
- Our allocation remains geared towards US risky assets because the fundamental context should remain more constructive, particularly as activity continues to grow solidly.
- US assets include the broad market as well as small & mid-caps and financials which benefit from tax cuts and deregulation. We are also long US dollar.
- Regarding our regional strategy, we have:
- A negative view on euro zone equities, for fundamental reasons, and considering that the election of Donald Trump poses additional downside risks to the region.
- A more uncertain view on emerging markets, which will depend on the measures taken by the new US administration, their sequencing, and on any additional China stimulus.
- A neutral view on Japanese equities.
- Concerning the equity sector allocation:
- We are buyers of European Real Estate, which should benefit from lower interest rates.
- We are more constructive on cyclical sectors such as Financials and Industrials while keeping Healthcare and Technology as core holdings.
- In the fixed income allocation:
- European government bonds are an attractive investment following the recent uptick in yields as they offer carry and a hedge, hence we keep an overweight on European duration as the economy is already facing some downside risks
- We remain cautious on US duration.
- We prefer to be neutral on credit markets which have already rallied. Even if companies will enjoy lower taxation, rate volatility could trigger a reversal of the current technical support.
- European credit would face more headwinds, essentially through export-driven manufacturing sectors.
- We keep an allocation to Alternative investments and to gold.
Our Positioning
In the short term, we brace for increased market volatility and maintain a preference for US equities within a balanced portfolio, with close attention on US interest rates and the dollar’s trajectory.
Looking to the medium term, the global trend of monetary easing — currently pursued by most developed economies — will continue to play a significant role, but so will Donald Trump’s return to the White House. The impact of his policy programme, depending on whether it is implemented in a moderate/soft or significant/hard manner, will be pivotal for both the US and global markets.
We are negative on euro zone equities and still on the fence on Emerging equities. We are overweight European duration but cautious US duration. We are neutral credit.