Donald Trump’s decisive victory in the US presidential election significantly influenced the news in November and provided a boost to the US equity market.
Although the specific economic policies that will be implemented remain uncertain until after his inauguration in January 2025, campaign promises to impose tariffs have raised concerns about inflation and the potential for retaliation from trading partners.
Conversely, proposed tax reductions and deregulation efforts are anticipated to support economic growth. Indeed, the president elect is already conjuring flashbacks to his first term in office with market moving policy announcements being issued through social media.
Recently, neighbours Canada and Mexico have been in the crosshairs on tariffs alongside China. But continental Europe should also be concerned with Germany sitting between Canada and Mexico on a large trade balance in goods with the US.
Source: J.P Morgan Asset Management.
With relatively few defence industry companies based in Europe and Trump pushing for Europe to place less reliance on US military capability, partly through commitment to greater military spending, there is likely a deal to be done.
Whilst we believed that either US presidential candidate would result in higher US bond yields, this will now be one of the challenges for President Trump to face. Lower taxes in the US, higher tariffs for imports and an uncertain relationship with China, Russia and NATO partners will have large implications for global markets.
When Trump won the election in 2016 his inflationary mandate proved hugely beneficial for risk assets. 10-year US bond yields were 1.8% in November 2016 when deflation was a primary concern but rose to 2.5% by the end of the year. The US stock market rallied 10% in two months and 65% during his tenure.
In 2024, with yields, inflation, the annual deficit and gross debt at much higher levels, the same policy mindset could have a very different outcome for risk assets.
This poses a challenge for long-term investors in the US equity market. Returns over an extended period are influenced by earnings growth and shifts in valuations. While expectations for earnings are elevated, especially among the largest companies linked to advancements in artificial intelligence, valuations are also notably high.
Source: Goldman Sachs Global Investment Research.
This indicates investors should prepare for lower equity returns over the coming decade and points to maintaining a more balanced, widely spread investment approach. Indeed, for US equities at least, the current levels of market concentration point to the advantage of a more equally weighted investment approach as found in the iShares S&P 500 Equally Weighted ETF, which is held within the T. Bailey fund of funds.
As widely expected, the Federal Reserve (Fed) cut interest rates by 25 basis points during the month, continuing its easing cycle. Fed Chair Jerome Powell noted robust economic growth and an easing labour market but was cautious about predicting the impact of new policies, indicating the politics have become more complicated for the Fed post the election.
The Bank of England similarly cut interest rates by 25 basis points, though inflation concerns from last month’s UK budget have tempered expectations for further cuts.
Your Money
During the month the T. Bailey fund of funds divested from the Schroder Global Energy Transition strategy. The short-term prospects for companies involved in this theme face greater difficulties following the outcome of the US presidential election. Nevertheless, the longer-term outlook remains positive and we continue to support this theme through an allocation to copper, a vital material with constrained supply that is essential for both energy transition and ongoing digitalisation.
The proceeds have been used to further build the position in the iShares S&P500 Equally Weight UCITS ETF introduced last month as we anticipate market performance to broaden.
In the T. Bailey UK Responsibly Invested Equity Fund we trimmed holdings in Morgan Sindall and XPS Pensions Group following strong periods of performance for both.
Proceeds were allocated to AstraZeneca on the back of share price weakness and to a new position in Bytes Technology, a name we like, having previously held it in the portfolio but for which valuations have softened in recent months.