• US equity markets gain after US elections, Europe retreats
• Economy and earnings stronger in US than in Europe
• Equity overweight slimmed down slightly

In October, the MSCI All Country World Index declined modestly by 1.1%, trimming its year-to-date gain to 17.8%. U.S. equities fell by 0.9%, impacted by disappointing earnings reports from major tech firms. Although tech giants like Microsoft, Meta, and Alphabet exceeded earnings expectations, investors were more worried about potential risks from projected high spending in 2025 and losses associated with ventures like OpenAI. Japanese equities provided a rare positive note, rising by 2.3%, while Chinese equities dropped sharply by 5.6% due to uncertainties surrounding government stimulus measures. October also saw a notable increase in U.S. Treasury yields, with the 10-year yield up by 50 basis points and the 2-year yield rising by 55 basis points, driven by robust economic data and fiscal policy concerns ahead of the election. Consequently, Treasury and credit indexes posted negative returns, with the Bloomberg US Treasury Index down by 2.4%. European sovereign bonds also saw declines, despite the European Central Bank implementing a third rate cut.

Markets have begun to absorb Trump’s triumph, with initial reactions reflecting expectations of stronger economic growth, rising inflation, a slower pace of interest rate cuts, and potential trade tariffs. The financial and energy sectors, the likely key beneficiaries of deregulation, led the S&P 500 to a new record high, as growth-sensitive small-cap stocks outperformed. The outcome of the election has answered some questions but raised others. Investors are confronted with fresh uncertainty around trade tariffs, immigration policies, and geopolitical issues. Trump is expected to clarify his policy plans in the coming days and weeks, which could contribute to market volatility. It is worth noting that during his first term, Trump often viewed stock market performance as a measure of his success. As a reminder, U.S. stocks have tended to perform well in the year following an election or during periods when the Fed eases policy, provided a recession is avoided.

In fixed income, investors have initially concentrated on the likelihood that a more expansionary fiscal policy will drive higher inflation and lead to a slower pace of rate cuts. Additionally, U.S. Treasuries are no longer viewed as the "safe haven" asset class of choice, as bond investors are increasingly concerned about rising U.S. government spending. The 10-year Treasury yield has climbed from around 3.6% in mid-September to 4.4% at the time of writing. In our view, the increase in yields has gone far and offers a chance for investors to lock in attractive yields as monetary policy easing continues. However, the global easing cycle remains on track, with the Federal Reserve, Bank of England, and Sweden’s Riksbank all cutting key policy rates this week. While Fed Chair Jerome Powell refrained from offering explicit guidance, he indicated that the U.S. central bank is moving towards a more neutral policy stance, with future decisions to be made on a meeting-by-meeting basis, dependent on forthcoming inflation and labor data.

 

Recent labor market data support the Fed's current policy stance. Nonfarm payrolls for October rose by only 12,000, well below the forecast of 110,000. Downward revisions for the prior two months suggest that underlying labor trends are not as robust as September’s figures initially implied, indicating that a highly restrictive policy may not be necessary. The U.S. economy grew by 2.8% in the third quarter, reflecting resilient growth. However, this does not signal that the economy is overheating. The Fed’s preferred inflation measure, the Personal Consumption Expenditures (PCE) Index, eased to 2.1% year-over-year in September, marking its lowest level in three years

 

Elsewhere, the USD posted its most significant advance in two years. However, we anticipate that dollar strength will diminish over the medium term, as its overvaluation and the substantial U.S. twin deficits are likely to exert downward pressure on the currency over time.

 

We believe that the current enthusiasm for U.S. stocks appears somewhat overextended, suggesting the possibility of a near-term pullback, similar to the retracements seen at the start of Trump’s first term in 2016. A similar dynamic applies to the recent sell-offs in European and U.K. markets, driven by concerns over potential trade tariffs and implications for European defense spending as a result of Russia-Ukraine tensions. The threat of imposing tariffs of up to 60% on Chinese imports also casts uncertainty over Chinese stocks. However, it’s possible that Trump may use these threats as a negotiation tactic, or that any tariffs applied could be temporary. This would mirror the pattern observed in his first administration, where significant volatility and short-term corrections were eventually followed by recoveries as tariff wars finally played out. Additionally, Chinese stocks are already attractively valued, and with the National People’s Congress (NPC) Standing Committee meeting set for Friday, markets will be attentive to any stimulus measures from Beijing aimed at addressing economic challenges.

 

In conclusion, while challenges remain – notably in terms of fiscal policy and political risks - we hold a cautiously optimistic outlook for the remainder of 2024 and beyond, underpinned by solid economic fundamentals, robust corporate earnings, and central bank rate cuts. However, a growing sense of pessimism clouds the outlook for the Eurozone. After a promising start to the year, with economic growth of 0.3% and 0.2% in the first and second quarters, a series of weak data points has renewed fears that momentum is waning. As a result, we have decided to reduce our overweight position in Europe this month.

Please find attached our last Asset Allocation Update for November.