• US equities benefit from election results
• Turmoil surrounding French budget not a systemic risk
• Equity overweight maintained

Global stocks performed well in November; the MSCI AC World Index returned 4.1%, increasing its gain for the year to 22.7%. As the outcome of the U.S. election reduced a significant uncertainty, U.S. stocks enjoyed a particularly strong month, recovering from a fall in October. Investor optimism grew around the potential for pro-growth policies under the new administration. The S&P 500 rose 5.9% last month, with gains across all sectors. U.S. small-cap stocks, perceived as major beneficiaries of the domestic economic outlook, surged over 11% during the month. The U.S. dollar strengthened to a one-year high against major currencies. Outside the U.S., the election outcome was met with some caution. Chinese equities underperformed, declining 4.1%, amid concerns over tariffs and disappointment with recent stimulus measures. Equity markets in the Eurozone and Japan delivered subdued performances in November.

 

Since the U.S. election, investors have been evaluating the likelihood, scale, and potential impact of proposed policies, including tax cuts, deregulation, and trade tariffs. In our view, tariff policy will play a significant role in shaping market dynamics over the coming year and is likely to be a source of volatility. However, the use of tariffs to address non-trade issues, such as illegal migration and drug trafficking, underscores the new administration's approach to using tariffs primarily as a negotiation tool. While recent tariff threats against Mexico, Canada, and China have heightened market concerns, we believe investors also recognize certain limits on the administration's policy agenda. Large budget deficits and rising net interest payments on the national debt make it unlikely that the administration will adopt measures that would sharply increase inflationary pressures.

 

We expect the Federal Reserve to look beyond a tariff induced one-off price increase and continue its trajectory of rate cuts toward achieving a neutral rate. In the immediate aftermath of the US election, yields rose as investors anticipated expansionary fiscal policies, greater inflation, and larger deficits. However, later in the month, yields retreated as attention shifted back to the prospect of further rate cuts, reinforced by Fed officials' comments indicating room for additional easing. Overall, U.S. rates saw a modest decline over the month, with the Bloomberg Treasury Index gaining 0.8%. In contrast, the decline was more pronounced in the Eurozone, where the Bloomberg Pan-European Aggregate Index rose by 1.7%, driven by weaker-than-expected economic data. After poor German retail sales in October, the Eurozone manufacturing Purchasing Managers' Index fell to 45.2 in November. These figures highlight ongoing economic challenges in the region, providing the European Central Bank with ample justification for further rate cuts. Political uncertainty increased the risk premium on French government bonds, though France’s manageable fiscal position suggests that investors should avoid overreacting to these concerns.

 

While U.S. tariffs are expected to remain a prominent focus in the coming months, they are not the sole factor influencing markets over the next year. The broader economic and corporate earnings environment will also play a key role in shaping the ultimate outcome in the real-economy and in portfolio returns. Profit development is crucial for shares, with nominal economic growth being decisive. At present, the backdrop remains favorable. As the new year approaches, the U.S. economy is performing well, supported by robust income growth and moderating inflation, which are bolstering consumer spending. Continued Federal Reserve rate cuts and strong growth in the technology sector are likely to sustain the economic expansion. Against this backdrop, we are confident with an overweight allocation to equities.

Please find attached our last Asset Allocation Update for December.