La Française: November market convictions post US elections
US presidential elections are now behind us. The verdict is out. Donald Trump has been elected the 47th President of the United States and in all likelihood, the Republicans will gain control over Congress. However, uncertainties remain.
What program does Trump want or intend to implement? How will countries retaliate against potential tariffs? How will his election weigh on geopolitical tensions? These are but some of the many questions that will take months to find answers to.
I can however advance, with some degree of confidence, that the United States is not about to reduce its budget hole. Spending is expected to increase by $5.8 trillion over the next 10 years, while the deficit is already estimated at 6.5% for this year and next. And, it is foreseeable that the deficit increase to 8%, or even more, in the years to come. This situation is unseen in an economy that is still, despite everything, close to full employment.
This should reinforce ongoing trends:
- A solid American growth rate, supported by consumption, that continues to increase by around 4% per year.
- Sluggish European growth, weighed down by the problems of its two main economies: France and Germany. Leading indicators do not predict any improvement in the near future, even if the increase in real wages should gradually restore consumption.
- And finally, the Chinese government which will likely continue to unveil fiscal stimulus plans in order to reverse the negative spiral of its real estate market and combat the probable increases in American tariffs. The first measures announced a few weeks ago already seem to be bearing fruit.
More generally, while inflationary risk appears contained for now, central banks could be challenged in the coming months, given current uncertainties. The Fed in particular will have to change its rhetoric: Namely because the American economy is doing well and its labour market does not seem to be deteriorating significantly, and secondly, in response to a potential rise in inflation as a result of Trump policies. The ECB, which does not like to decouple its monetary policy from that of the Fed, might have to choose between maintaining a restrictive bias or accepting a fall of the Euro and its consequences.
Bond markets are currently anticipating terminal rates close to 4% in the United States and 2% in the Eurozone. We consider this as “restrictive” in both zones but probably necessary in a world where budgetary policies are so accommodating.
In this context, it seems justified to approach the coming months with measured bias. We maintain our positive bias on equity markets with a clear preference for US stocks for multiple reasons: a better economic climate, upcoming tax cuts, profit growth that the Eurozone can only dream of and innovation that is still present. On the credit side, and despite narrow spreads, we maintain a rather positive bias on both Investment Grade and High Yield. Lastly, we are taking advantage of the current rise in long rates to gradually increase the duration of our portfolios with a preference for the Eurozone.