Simplify the complex with clear and concise market insights direct from our investment experts every week.
Global outlook with Dermot O’Leary, Chief Economist
Do you think the result of the US Presidential has altered the outlook for the US economy? How will the US fare relative to the global economy as a whole?
- It was a decisive victory for Trump and the Republican Party. The initial market reaction has been growth-friendly. It seems that the result and the market reaction will lead to a more expansionary budget in the coming years. Trump now has a clear mandate and a pathway to implementing domestic tax cuts. What we’re seeing is a short-term sugar rush from fiscal policy in the US.
- There is a big concern around tariffs. We don’t yet know the fiscal effect of the lower taxes and higher tariffs that Trump has suggested he will introduce. For instance, how will such measures affect US debt levels? The cost of the domestic tax cuts might be offset by tariffs, but that has real implications for global growth. There are fears of a trade war should tariffs be placed on exports from US rivals like China, and / or on exports from traditional allies like Europe. So, while we see a short-term positive for the US, a Trump presidency could hamper growth in Europe and China. On Friday November 8, China introduced some stimulus measures that were likely brought forward as a consequence of the US election result.
- Measures prospectively introduced by Trump will likely not affect the economy until 2026. But if substantial tariffs were introduced, how would Europe react? We haven’t seen the kind of tariffs currently being contemplated for almost an entire century of economic history. The Smoot-Hawley Tariff Act was introduced in 1930 to help American farmers by raising duties on a range of agricultural and industrial goods. Economic historians cite this legislation as one cause of the Great Depression. We would not at this point claim that Trump’s policies will have the same effect, but tariffs will have negative implications for global growth and global trade.
How did the US Federal Reserve (Fed) react to the election, and what is its view on inflation now?
- Federal Reserve Chair Jerome Powell was asked last Thursday about the implications of the Trump presidency for inflation, growth, and indeed for his own job. He declined to offer any prognosis. We can at least count on stability in the institution itself. By law, the Chair cannot be dismissed by the President. The Fed does not model the predicted outcome of possible changes in fiscal policy. However, if you applied those changes to the Fed’s models at the moment, you would see the expectation of higher interest rates.
- Inflation is still proving more durable and difficult to solve than the market expected. In September, the 50 basis points cut from the Fed raised the possibility from the market’s perspective that there would be a very speedy reduction of rates, but that prospect is not being fulfilled. We’re on a slower journey back to neutral-level rates, and it’s still a disinflationary environment.
Markets and macro insights with Bernard Swords, Chief Investment Officer
What was the market reaction to US election?
- It was a dramatic week in financial markets as the result of the US election became clear. In the presidential race, there was a fear of a long, contested results process, and the quick end surprised many. It was also a relief to equity markets. The prospect of a more growth-oriented policy in the US with less regulation was the main theme animating equity markets.
- World equities are up 3.3% in Euro terms since the election. However, as expected, there were regional differences. The markets factored in the prospect of higher and broader US tariffs. The US was the strongest, almost 4% in local currency terms, as the ‘America first’ policy has become firmly entrenched. Asia Pacific is also up, a little over 0.5%, as there remains hope of a fiscal policy response in China. The euro area was the laggard and is down 0.6%, influenced by the implications of more tariffs.
- The new administration is seen as more growth-oriented, with a looser fiscal policy. Thus, the cyclical sectors (Industrials, Consumer Discretionary, Financials) outperformed. The prospect of less regulation boosted returns in Financials, IT, and Communication Services. The defensive sectors (Healthcare, Consumer Staples, Utilities, and Property) lagged as the possibility of higher bond yields and increased economic growth capped these sectors.
What does it mean for our positioning?
- The result will likely shift growth worldwide. The US will benefit, and the rest of the world will lose out to a modest extent. At the same time, the general circumstances will probably slow the interest rate-cutting cycle. Consequently, there does not seem to be a great need to alter the asset allocation at this stage.
- One clear conclusion that can be drawn is that the world will be more US-centric. However, we had positioned portfolios for this eventuality through a high exposure to the US equity market. The prospect of a stronger US dollar adds to the attractiveness of our positioning. We have said that global policy was shifting to support growth. The election result is another step in that direction. We have already increased the cyclical bias of client portfolios this year. Therefore, we are strongly situated to benefit from the likely policy developments following from the outcome. We do not see this event as an impetus to adjust portfolios. Our client portfolios have performed well in absolute and in relative terms over the last week. One can never ‘rest easy’ but at least we know we have not been ‘wrong-footed’ by this event.
The week ahead: what to watch out for
This week is unlikely to offer so much spur to reflection on investment strategy, but it will yield significant data for consideration. The main source will be the inflation report (Consumer Price Index) issued in the US. It has shown uneven results of late. All major regions will report on industrial production. Currently, this constitutes the troubled sector of the global economy. Finally, we will have retail sales data from the US and China, which will reveal if there has been any change in momentum in that area.
