November 2024*
Donald Trump is returning to the White House. While some aspects of Trump’s domestic and foreign policies will become clearer over time, we can confidently highlight that he will inherit a different US and global environment than in 2016. The US budget deficit is wider, US recession risks are elevated, the US dollar is rich on valuation metrics, and the US equity market is expensive in both absolute and relative terms. The overall backdrop indicates a higher bar to maintain ‘US exceptionalism’. We stay neutral US equities. Our asset allocation continues to balance some pro-cyclical and defensive exposure as the global economy decelerates. This quarter we upgraded Netherlands to overweight, funded by a reduction to other Eurozone countries.
Donald Trump will return to the White House and will have a Republican-controlled Congress. Markets were already moving towards a Trump win leading up to the election, and initial price action is a continuation of that trend: US equities are stronger, US Treasury yields are higher, and the US dollar is appreciating. The election results may present some challenges for investors, but we caution against overreacting to the initial price action ahead of the January inauguration.
Trump 2.0 will inherit a different US and global economy than 2016. As Table 1 highlights, the US economy and equity market may struggle to maintain dominance. The US budget deficit is wider, recession risks remain elevated, and Fed policy is more restrictive despite recent policy easing. The US equity market is also more expensive in both absolute and relative terms, while the US dollar is 12% stronger on a Real Broad Effective Exchange Rate (REER) basis. Higher tariffs, deregulation, and tax cuts may contribute to an extension of these trends, but current valuation metrics indicate US assets are already well priced for strength. Also, the US equity outperformance and US dollar appreciation started around 2011 (see Charts 1 and 2). In other words, Democratic Presidents (Obama and Biden) and a Republican President (Trump) have been in office over this period. Trump 2.0 may support further US capital inflows, but global macro and market factors have and will continue to drive asset prices.
The Global Purchasing Manager Index (PMI) is tracking an above-trend pace of 52.3 but has decelerated from its cyclical high of 53.7 in May. The US economy is still exhibiting resilience but with warning signs against complacency. The Atlanta Fed GDP Nowcast estimate is tracking 2.4% growth in Q4, falling from 3.5% in Q3. The US labour market is weakening across several measures, which may start to weigh on the US consumer. Elsewhere, China’s policy is becoming more stimulative, providing some support for global growth. China’s stimulus could become more aggressive in reaction to higher US tariffs, which likely will be a major headwind for the global economy.
Before the election, most major central banks cut interest rates as activity and inflation started to cool. If US fiscal policy becomes more expansionary under Trump (with a Republican controlled-Congress), more Fed rate cuts could be priced out. In addition, a resumption of inflationary pressures (associated with some potential Trump policies such as tariffs) and increased Treasury issuance could contribute to a further rise in bond yields. However, the bond market could reverse if labour market data continues to soften, and US tariffs will likely negatively affect US and global growth. A US recession remains an elevated risk over the coming six to twelve months.
The US dollar is expensive on standard valuation metrics. Higher US tariffs may contribute to dollar strength initially, but higher inflation and growing US fiscal concerns may eventually weigh on the dollar. Valuations indicate downside risks as the Real Effective Exchange Rate (REER) is around previous historical peaks (Chart 1 and 2). Long-term investors should maintain exposure to International equities that will benefit from an eventual reversal in the US dollar.
| Chg | -2 | -1 | 0 | +1 | +2 | |
|---|---|---|---|---|---|---|
| US | – | |||||
| Canada | – | |||||
| Eurozone | – | |||||
| Switzerland | – | |||||
| UK | – | |||||
| Japan | – | |||||
| Australia | – | |||||
| EM | – |
| Chg | -2 | -1 | 0 | +1 | +2 | |
|---|---|---|---|---|---|---|
| Canada | – | |||||
| Eurozone | – | |||||
| Switzerland | – | |||||
| UK | – | |||||
| Japan | – | |||||
| Australia | – | |||||
| EM | – |
*This publication reflects asset performance up to 31 October, 2024, and macro events and data releases up to 7 November, 2024, unless indicated otherwise.
The information contained herein is obtained from sources believed by City of London Investment Management Company Limited to be accurate and reliable. No responsibility can be accepted under any circumstances for errors of fact or omission. Any forward looking statements or forecasts are based on assumptions and actual results may vary from any such statements or forecasts.