Once again, pollsters and forecasters were proven wrong. What was thought to be a close presidential race turned out to be anything but, with Trump winning decisively.
The morality of Trump may be a topic of discussion, but the politics of Trump is not. It is very clear he will cut taxes, deregulate the US, spend on infrastructure, put American interests first, and use the S&P 500 – the US stock market – as the key barometer of his presidency. No wonder stock markets responded positively to the news he had won.
Trump will go down as one of the most consequential presidents of our lifetime. Very few leaders have a lasting impact on the countries they govern. Thatcher, Reagan and Gorbachev changed the arc of their countries, and Trump did that in his first term by redefining the relationship between the US and China in a way which cannot be undone. It is likely the second Trump presidency will be equally consequential as he knows how government works now and in theory should be more successful in delivering his agenda.
If Trump is successful, it is likely the US will remain a positive place to invest. Lower taxes and fewer regulations are business and corporate profitability friendly. All other things being equal, expectations for economic growth in 2025 should be higher and the probability of the often-mentioned imminent recession lower.
“If Trump is successful, it is likely the US will remain a positive place to invest. Lower taxes and fewer regulations are business and corporate profitability friendly.”
The downside to Trump, however, is also easy to see. Stronger economic growth will revive concerns over inflation, which has already been seen in rising bond yields. The ‘America first’ narrative may have important consequences for Ukraine, and even Taiwan, where their defence may not be seen to be as strategically important as in the past. The erratic nature of his policy making will also create greater volatility.
Putting this together, the best way I can describe the investment environment with Trump is higher risk and higher reward. Economic growth in the US will likely be stronger, but so could inflation and geopolitical tensions. On balance, we think it likely equity and bond markets will continue their recent trends: up for equities, down for bonds.
Lessons from the Q3 results season
We are now towards the end of the final large reporting season before the year end. Corporates offer the most effective window into the world as it is today and offer views on how the future might be. Here are some takeaways:
- The overall results season has been better than expected, with the majority of companies beating expectations for their sales and profits. If there is one common theme to this it would be the global economy, whilst not uniform, remains strong. My conclusion: there is no recession on the horizon.
- Artificial Intelligence (AI) is a key area for all companies. Whilst the narrative is dominated by the large technology companies, which are collectively spending hundreds of billions of dollars building out data centres, the real story is every company is attempting to integrate AI into its operations. The initial incentive for this is cost savings and enhanced productivity as many laborious and skilled tasks can now be done with AI. Longer term it will allow data driven businesses to offer more value-add products and services which will drive revenue growth. My conclusion: AI is for real.
- China remains a difficult market for all companies who operate there. What started as a property boom and bust, which has not been proactively addressed, has turned increasingly into a consumer recession. This has created downward pressure on the economy at a time when corporates and investors have become wary of investing in the country for geopolitical reasons. My conclusion: recent stimulus packages may improve the underlying economy but for the now China is economically weaker than expected.
- Atoms, bytes and genes is alive and well. For those who have heard us talk about this as a way of thinking about the evolution of the physical, digital and natural worlds, which constitute everything around us, there is ample evidence that trends in these areas will drive growth in the corporate world for many years to come. The desire to invest in infrastructure goes on unabated and Trump may accelerate this. The development of the digital world is still in its early stages, despite how much more our lives have embraced technology already. Finally, the natural world continues to see high levels of innovation in healthcare and disease treatments. My conclusion? Whatever inflation, economic growth and geopolitics brings, we are in a time of innovation and investment which will support the prospects of the corporate sector.
The home straight
We are moving closer to the end of the year, when both its story and the result becomes clear. All years have their challenges and idiosyncrasies, and this one is no different, but for equity investors it has been a positive one. Key global markets, such as the US, have made all-time highs and absolute levels of return have been at or above high single digits. This reflects corporate profitability continuing to grow at a good rate, which is the fuel for equity markets. It also reflects the view that interest rates, a key variable in valuing corporate profits, have begun to fall. Corporate profits and interest rates will be key variables for equity markets in 2025.
Fixed income markets have however struggled to keep up with equity markets, but areas such as corporate bonds have delivered positive returns. Bonds will also remain sensitive to interest rate and growth expectations.
It has been a bifurcated market, however. The US is a strong economy, but there are two types of consumer: wealthy consumers, typically those who own property and shares, are spending freely – hence why it is hard to get a plane ticket between New York and London; however, consumers on lower income are struggling with inflation that has not been compensated for in wages. A good example of this can be seen in the airlines sector continuing to make new highs, whereas dollar stores are struggling.
The same goes for China; consumption is weak and companies who sell into that market are struggling. However, the industrial sector is stronger, as exports of goods in key sectors such as cars are booming. Even though the overall Chinese economy is struggling relative to its past, there are pockets of strength.
What this teaches us is that generalisations can be useful but are rarely the full story. It has been a good year for investors so far, but what you’ve owned and where has mattered more than ever. This is a trend we expect to continue.
This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.