Trump’s return buoys US market, but global impact is still unclear

US risk assets soared in November. Investors cheered by the election of Donald Trump have bid up assets ranging from cryptocurrencies to US banks. This indiscriminate buying has broadened this year’s US equity rally out from the very narrow market leadership we saw from the mega-cap tech stocks for most of the year.

Presidential elections tend to lead to relatively muted market reactions, so why have we seen such a sharp rally this time round? While Donald Trump was favoured to win the election, a ‘red sweep’ of the Republicans taking the presidency, the House, and the Senate was a less likely prospect.  With this the market expects a much friendlier business backdrop ahead. Taxes are likely to drop, adding an estimated 4% to US equities earnings. More impactful will be lighter touch regulation in the next four years.

The 'America First' agenda under Trump has unfortunately resulted in a decline in global equities (excluding the US) in dollar terms over Q4. Year-to-date, the S&P 500 has returned 27%, global equities (excluding the US) have only risen by 7%. While Trump has referred to tariffs as “the most beautiful word”, a significant trade war will have a disproportionately negative impact on China, Europe, and Asian exporting nations.

US equity performance compared to non-US equities

The threat of tariffs

The tariff threat comes at a bad time for Europe. European growth has been weak since the summer as the manufacturing sector continues to contract (European manufacturing November PMIs fell to 45). This has been particularly acute in Germany where industrial production is down to levels last seen in 2010. While European equities are cheap, a poor growth outlook has seen reallocating capital away from Europe. We think European bonds will be well supported though, as the ECB cut rates to avoid recession.

The global growth outlook

Overall, we think the environment remains supportive for risk assets. Growth remains robust, led by US exceptionalism. Following the Federal Reserve’s recent November meeting, rates have been cut by a total of 125 basis points since September. We are thus seeing easing monetary policy while growth remains above trend in the US. US growth can remain intact if Trump’s pro-business policies and tax cuts continue to buoy animal spirits across US businesses.

While the outlook for growth outside in the US is more mixed, the valuations of global equity markets ex US are compelling as forward price-to-earnings ratio are around average.

Furthermore, the extreme relative outperformance of US equities in the last few months is likely to not repeat to the same degree on a tactical basis. The dollar remains harder to call, while US exceptionalism is still conducive to dollar outperformance, valuations of the US dollar are at its most expensive levels in 30 years. We have limited conviction of the direction in the dollar, and we remain neutral now.

Fixed income assets have de-rated since September, with the US 10-year yield rising from 3.6% to 4.2% today. Given the strong growth outlook, which can lead to upside risks on inflation, we think bonds are fairly valued. We would have to get more convincing evidence of inflation undershooting central bank targets to significantly overweight fixed income.