After Trump victory, all eyes on inflation

A resilient US economy, the anticipation and eventual victory of Donald Trump and his recent appointments along with risks around inflation have been driving nominal and real yields over the past months. But US equities and the dollar rose amid a belief that the US economy would benefit from Trump’s policies at the expense of the rest of the world, i.e., Europe and some Asian countries. While we agree that US policies would reverberate across European assets and emerging markets, the actual impact depends on specific measures and countermeasures...

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Vincent Mortier

Vincent Mortier

Group CIO

US economic resilience and Fed rate cuts are marginally constructive for risk assets, and we prefer to play areas where earnings momentum is favourable and valuations are less of a concern.

Vincent Mortier, Group CIO

Diversify towards attractive segments

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Diversify towards attractive segments

Trump’s clean sweep in the US elections is positive for near-term growth in the country and should continue to drive market interest. This, at a time when the Fed is cutting rates, should be mildly positive for risk assets. However, we aim to benefit from this through equity segments where valuations are attractive. Interestingly, the same factors that could boost American assets (growth, high deficits etc.), may create upward pressure on US yields, and opportunities around curve steepening. In addition, any protectionist tendencies from the US, and consequently from other parts of the world, could create headwinds for markets. Hence, we prefer to maintain a diversified stance in this evolving economic backdrop.

Stay tactical and granular on duration

The Trump trade has seen a sharp move upward in bond yields and the next leg up should come from the actual implementation of Trump’s agenda around taxation, international trade and immigration etc. In particular, there has been a debate about how much of all this would push up yields at the long end of the curve, but we still see value in the intermediate part. More recently, the fall in yields points to how quickly markets’ perception of fiscal policymaking could change. In Europe, political uncertainty in select countries could affect yields along with the ECB’s stance on rates. The ensuing volatility underscores the importance of identifying which parts of the yield curves across which geographies offer attractive risk-free yields and stability. At the other end are corporate credit and EM debt that could enhance investors’ long term returns.

Stay tactical and granular on duration

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Play equities beyond US mega caps

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Play equities beyond US mega caps

Markets have moved quickly to price-in near-term nominal economic growth in the US but we would like to question that narrative because the starting point of the ‘Trump trade’ is different this time when compared to 2016. When Trump was elected President for the first time, US stock valuations, the fiscal deficit and public debt were not as high as they are today. However, this time around, the Fed is in an easing mode, although this could be challenged if there is volatility around inflation. As a result, we could see an upside for equities, but it would be characterised by rotation favouring cheaper segments and those that show earnings resilience. In particular, we see select opportunities in small and mid caps, Europe, Japan and emerging markets in companies displaying pricing power and balance sheet strength.

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