EQUITIES RALLY 

The election of Donald Trump as U.S. President has sparked a notable rally in equities, with markets responding positively to the resolution of political uncertainty and expectations of pro-business policies. Sectors such as banking, energy, and small-cap companies have particularly benefited due to anticipated deregulation, tax cuts, and fiscal stimulus.

What happened?

Equities rallied, and bond yields rose on Wednesday as President-elect Donald Trump’s election victory fueled expectations of deregulation, tax cuts, and higher inflation. The S&P 500 gained 2.5%, bringing it to 5,929, while US Treasury yields climbed +16bps to 4.43%.

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• At the time of writing, Trump has secured 295 electoral votes, compared to Vice President Harris’s 226, ensuring his victory. Republicans have also gained control of the US Senate for the first time in four years. In the House of Representatives, Republicans lead the Democrats, 205 to 189, respectively, and look likely to command a majority, though the precise outcome has yet to be determined. Harris called Trump on Wednesday to concede the 2024 US presidential race.

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• At a sector level, financials led gains on Wednesday, up 6.2%, amid hopes for regulatory relief, while energy, industrials, and consumer discretionary sectors also posted strong gains. Small-cap stocks surged, with the Russell 2000 up 5.8%.

Elsewhere, the US dollar strengthened broadly against major currencies, including the pound, euro, and yen, and the VIX index of implied equity market volatility dropped to its lowest level since the end of September, reflecting market relief over a swift and decisive election result.

What to watch next?

The FOMC decision on 7 November. We expect the Fed to continue to move toward a neutral policy stance, and we do not expect it to immediately change its outlook given uncertainty around policy execution remains high. An additional 25bps rate cut on 7 November looks highly likely, and in our base case, we expect another 25bps cut in December and 100bps of easing in 2025. At the margin, the Fed may slow the pace of rate cuts if it perceives that potential changes to migration, trade, or fiscal policy may lead to higher inflation.

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China fiscal stimulus. A Trump victory raises the probability of very large tariffs on Chinese exports to the US and challenges the outlook for China stocks. At the same time, China stocks are already inexpensive, and markets will be watching the outcome of the National People’s Congress (NPC) Standing Committee meeting on Friday to see if Beijing may increase and front-load stimulus spending in response. We keep a Neutral stance on China equities for now.

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Final seats in Congress. At the time of writing, the Republicans had already regained control of the Senate with 52 seats (51 needed to win) and with 394 of 435 races for the House of Representatives called, the Republicans have won 205 seats and the Democrats 189. In the weeks ahead, investors will be watching for the exact scale of the Republican majority in the Senate and whether a Republican majority in the House is confirmed. Narrow majorities could make it more difficult to pass fiscal legislation and raise the probability of gridlock following the 2026 midterm elections.

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Policy statements from President-elect Trump. The outcome of the election has answered some questions but raised others. The uncertainty of a contested election, and the potential for higher corporate taxes and greater regulation has been removed. But investors now face fresh uncertainty on trade tariffs, immigration policy, and geopolitics. President-elect Trump is likely to elaborate on his policy intentions in the coming days and weeks, which could create market volatility. However, it is worth remembering that during his first term he used the performance of the S&P 500 as a barometer of his success.

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What are the investment implications?

Markets have started to digest Trump’s victory, with the initial response pointing to expectations of stronger growth, higher inflation, a slower pace of interest rate cuts, and trade tariffs. As more detailed policy proposals emerge from the Trump transition team, investors should brace for further swings ahead. We advise investors to be ready to use any outsized market reactions to build stronger long-term portfolios.

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In equities, we expect the S&P 500 to each 6,600 by the end of 2025, from 5,929 at present, driven by solid US growth, lower interest rates, and enthusiasm over AI. Technology, utilities, and financials are among our preferred sectors. The key potential beneficiaries of deregulation—financials and energy—led the S&P 500 to a fresh record high on Wednesday. That was in line with our view that these sectors would likely outperform in the event of a Trump victory. The tech sector also advanced. The industry could face headwinds from trade tensions, but we do not believe this will outweigh the structural growth story over the medium term, including optimism over the accelerating commercialization of AI.

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The risk of higher tariffs on Chinese exports to the US pushed the CSI 300 and Hang Seng benchmarks lower on Wednesday—though declines were relatively modest. While we acknowledge the headwinds that tariffs could create, we note that China stocks are already inexpensive, and it is possible that Beijing may front-load stimulus spending more aggressively in response.

In fixed income, investors have initially focused on the potential that a more expansionary fiscal policy will contribute to higher inflation and a slower pace of Fed rate cuts. The 10-year Treasury yield has climbed from around 3.8% at the start of October to 4.43% at the time of writing. In our view, the increase in yields has gone too far and offers a chance for investors to lock in attractive yields as the easing cycle continues.

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In currencies, the US dollar gained renewed momentum from Trump’s win, with the 1.7% gain in the DXY index the largest one-day advance in two years. However, we expect such gains to fade over the medium term. The dollar’s overvaluation and the US’s significant twin fiscal and current account deficits are likely to weigh on the currency over time. Investors should therefore consider using current dollar strength to diversify into other G10 currencies.

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The price of gold eased from recent record highs. But looking ahead, we believe that higher deficits, geopolitical uncertainty, and continued central bank buying should lead to upside over the coming months. We have a USD 2,900/oz target for September 2025 versus USD 2,670/oz at the time of writing.

What does a decisive Republican victory mean for emerging markets?

6 Nov 2024

The Republican Party achieved a historic victory in this week’s US election, securing a strong mandate to effect change with significant influence across the executive, legislative, and judicial branches of government.

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Donald Trump won on a platform advocating lower taxes, deregulation, strict immigration control, a focus on domestic interests over international affairs, and higher trade tariffs. There is considerable uncertainty regarding the sequence and extent of policy implementation. However, the strength of the mandate may narrow the gap between campaign proposals and actual policies.

Few emerging markets are expected to thrive amid increased uncertainty over global trade, US waning support for multilateral institutions, and a deepening fragmentation of the global economy. The cross-border movement of people, capital, goods, and services is likely to face increased friction; this will be coupled with higher US interest rate volatility, as markets digest Trump’s fiscal proposals. Clearly, the near-term post-election environment appears challenging for emerging markets, despite tailwinds related to China’s stimulus and further Federal Reserve rate cuts.

Equities

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Even in this complex backdrop, we expect emerging market stocks to deliver mid- to high-single-digit returns driven by earnings growth. North Asian markets, particularly Taiwan, offer appealing upside potential from the artificial intelligence wave. India, with its domestic focus and “geopolitical swing state” status, also presents attractive growth opportunities. We also favor South Africa, benefiting from domestic reform momentum and favorable valuations.

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For China, Trump’s victory clouds the near-term outlook. Nonetheless, recent domestic policy signals since late September indicate a strong commitment to stabilizing the economy, providing a cushion for market sentiment. We are monitoring the upcoming National People’s Congress Standing Committee meeting, expected to unveil more detailed support addressing cyclical and structural challenges.

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Higher tariffs could negatively impact companies with significant US revenue exposure. Mexico appears especially vulnerable, at least initially. We expect the bilateral relationship to eventually stabilize, as Mexico's role in North American manufacturing is crucial for competitiveness and for keeping US inflation low.

Bonds

Emerging market bond spreads over US Treasuries have been supported by resilient global growth. Emerging market sovereigns are also seeing moderate net positive ratings actions this year, concentrated in countries that have improved their fiscal trends. Sovereigns like Brazil, Costa Rica, Paraguay, Oman, Serbia, Qatar, and Turkey have been upgraded, helping the asset class remain resilient to recent US interest rate volatility.

Emerging market US dollar-denominated bonds—although largely rated as investment grade—offer interest rates of 6.5-7.0%, well above those of US high-yield bonds. We expect emerging market bond spreads to remain stable over the next six to 12 months, allowing investors to achieve high-single-digit returns. Emerging market bonds also provide broad diversification across countries, limiting exposure to those targeted by US tariff policy.

Currencies

Emerging market currencies may remain under pressure in the near term due to upward moves on US Treasury yields and uncertainties surrounding Trump’s tariffs. However, it is unlikely that the US dollar’s gains will be sustained. Unlike in 2016, the Fed is in a cutting cycle, the fiscal deficit is higher, and US dollar valuations are stretched. Thus, we maintain a view of medium-term dollar weakness, which should eventually support emerging market currencies.

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The CNY and MXN are particularly exposed to US policy changes. We have raised our USDCNY forecasts for the next year to as much as 7.5 to reflect moderate depreciation. In the short term, the People’s Bank of China (PBoC) is likely to contain currency spikes. However, in the medium term, the risk for the currency will likely be skewed towards depreciation.

In the short term, we think the MXN could depreciate to as much as 21 against the US dollar, given external trade and tariff uncertainty, and domestic reform noise. However, we expect the Mexican peso to eventually recover to around 19.5 by the end of 2025, as we believe the fundamentals of the bilateral relationship with the US will hold.

Don’t just do something, stand there!

6 Nov 2024

In recent election cycles, we've seen a consistent pattern in the confidence measures such as the University of Michigan Consumer Sentiment Index: opposition party investors are more pessimistic than incumbent party investors, and this sentiment has shifts significantly when political power changes hands. When your political party is in power, it not only improves your optimism about the economy—it also seems to have an impact on how you evaluate your current financial circumstances.

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For example, on the cusp of the 2016 election, Republican consumer sentiment was 27% lower than Democrat sentiment. By the time President Trump was inaugurated, Democrat sentiment fell 24% and Republican sentiment rallied 56%, more than reversing the sentiment gap. The same thing happened in 2020, when Republican sentiment went from 35% higher than Democrat sentiment to 31% lower after the election.

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Before the 2024 election, Democrats scored about 70% higher on the University of Michigan Consumer Sentiment Index. If the pattern holds, many Democrats are likely to become significantly more pessimistic in the months ahead, viewing President-elect Trump's victory as a risk to markets and the economy.

There is a risk that many Democrat investors will take this pessimism to heart and reduce their stock allocations. This would be a mistake, in our view, because such politically driven pessimism has often been a costly mistake for investors in past elections.

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To demonstrate this, we looked at the impact of this partisan consumer sentiment from 2006 to 2024 in a recent Election Watch report. To the extent that investors reduced portfolio risk to reflect their newfound pessimism about the economy after losing past elections, they likely missed out on significant market gains in the early days of the incoming administrations. For example, Democrats would have missed out on about 8% of potential growth during President Trump, while Republicans would have earned about 15% less under President Obama and 13% less under President Biden. In all, we estimate that trading based on the opposition party's consumer sentiment index readings would have underperformed a buy-and-hold investor by about 0.9% per year, or about 61% from September 2006 to October 2024.

Action bias

Events like the US election are often a catalyst for investors to think about making major changes to their portfolio. Such events give us a strong urge to do something— anything—to gain control over the situation. In behavioral finance, this type of anxiety is called “action bias,” and it's a very common trait for investors.

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Unfortunately, when it comes to investment adjustments, most decisions are bad decisions unless they reflect a legitimate change to your financial goals or circumstances. In a famous paper called “Trading is Hazardous to Your Wealth,” which studied 66,000 households' brokerage statements between 1991 and 1996, high-turnover portfolios suffered 6.8% annualized underperformance when compared to low-turnover households.

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This isn't that surprising. Human nature, transaction costs, and tax costs are all working against us whenever we trade. Even when higher turnover does lead to higher returns, it also results in higher taxes and transaction costs—so you would expect higher turnover investors to have lower net returns, on average. With this in mind, the default should usually be to leave the portfolio on autopilot.

On the other hand, complete inaction isn't usually a good idea, either. Fortunately, many valuable portfolio management strategies—like rebalancing and tax-loss harvesting —can add value in most market environments with a high likelihood of outperformance. For example, unless you have rebalanced recently, it's likely that your stock allocation has “drifted” above your long-term asset allocation target at the expense of a smaller-than-target bond allocation. Moreover, there may be opportunities to implement a tax-loss swap in your bond holdings, given bonds' recent losses. These strategies may help to scratch the “itch” to take action.

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If you do decide to make a portfolio or risk profile change, it can be helpful to write down your reasoning. As a general rule, it's okay to make adjustments to reflect new spending or retirement goals, or a fundamental change to the long-term outlook for markets—but don't just do it to feel more comfortable. Short-term comfort often leads to long-term regret.

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Here are a few approaches to help you dispel action bias:

• Focus on what you can control. There is a lot of wisdom in the Serenity Prayer, which asks for “the serenity to accept the things we cannot change, the courage to change the things we can, and the wisdom to know the difference.” Investing requires us to accept short-term volatility in exchange for long-term growth potential; even so, we do have tools to improve the risk-return dynamic—for example, building a well-balanced, diversified portfolio.

• Automate good action. Talk to your advisor about setting portfolio management plans—like rebalancing if your portfolio goes more than 5% from your equity allocation target, or automatically harvesting tax losses—to gain the benefits without adding to the number of active decisions you need to make. Many portfolio management strategies work best when they are automated, or implemented by a professional, because they require small, frequent changes that are often counterintuitive and uncomfortable.

• “Quarantine” bad action. The word quarantine comes from quarantina, an Italian word for the 40-day period that ships would need to be isolated during the Black Death plague. When you decide to make a big change to your long-term strategy or plan, give yourself some time to reconsider—maybe not 40 days, but at least a week.

• Focus on your goals. We recommend using the Aura  Wealth Way approach to design a portfolio that reflects your goals and your values. A purpose-based approach to investing can put risks and changes into context, helping you to think objectively about they may impact your probability of meeting your goals. When planning for the future, it's often helpful to envision your future self, and try to do your best for them. Invest for growth to help “future you” retire on time, pay for family vacations, and give back to the community. Having empathy for your future self can often help you to look past short-term uncertainties and tackle what may be the biggest investment risk of all: the opportunity cost of missing out on growth potential by investing too conservatively with long-term investment assets.

• Manage risk. Regardless of whether you are worried about politics, geopolitics, or something else, the bad news is that there is always a risk that we will experience market volatility, or even a bear market. The good news is that most investment portfolios have fully recovered their losses—even after the largest disruptions in history—within three to five years. Therefore, the best way to protect yourself against market risk is to build a Liquidity strategy that can fund your spending for three to five years, thus allowing you to maintain your lifestyle even if there is a recession or a market drawdown.

Sustainable investing perspectives: Trump 2.0 presidency implications

6 Nov 2024

The Associated Press declared that former President Trump is set to reenter the White House, and the Republican Party will regain control of the Senate. The House is still undecided. While some votes may be recounted, we recommend that investors assume a Trump presidency.

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What does it mean for international climate investing and sustainable and impact investing more broadly?

As we detailed in the ElectionWatch Sustainable Investing Perspectives report, a Trump Presidency and "Red sweep" outcome has mixed impact on sustainable investing depending on the area of focus. Most importantly, we note that despite campaign rhetoric and headlines, the performance of sustainability-focused strategies has historically been more impacted by macro conditions than the party governing from the White House.

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On climate investments, we look at US domestic and international policy. On a domestic level, the Inflation Reduction Act has been a significant boost to activity across sectors from renewables,carbon capture, and electrification, especially in states that voted for the Republican candidate. This also matters to global investors who have been finding opportunities with US listed and private companies. We do not expect a wholesale reversal of the IRA, although parts related to EV credits could be at risk. However, a potential slowdown in disbursement from the Department of Energy seems likely.

A continuation, or possible broadening, of tariffs against China might impact US companies working toward climate solutions which have reliance on China for inputs, although we note that the relative impact here is muted compared to the status quo given existing tariffs from the Biden administration.

A swift reversal of environmental policies from the Environmental Protection Agency could be possible, following the steps of the first Trump presidency. We believe the impact of a potential reversal would not be immediate in market terms, in particular as some expectations on environmental performance are embedded in the market. For example, energy companies likely retain their focus to reduce methane leakage from operations. For global investors, with time a reduction of environmental policies in the US might mean needing to differentiate among companies leading on practices by going above and beyond.

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The US election outcome may not bode well for international climate negotiations, as COP29 (the United Nations Climate Change Conference) is set to open in Azerbaijan next Monday. Trump withdrew the US from the Paris Agreement during his last tenure, which was reversed by Biden. Negotiators will go into the meeting likely assuming the same action from the US, which could cast a shadow over any decisions. The challenge is also funding: Under the Biden administration, annual international climate finance coming out of the US reached an estimated USD 11bn in 2024, which accounted for ~10% of the current USD 100bn pledge in funding provided by rich countries to emerging markets. Comparatively, when Trump was previously in office—and when he withdrew from the Paris Agreement—this was less than USD 3bn. The impact of any US pullback would be most severely felt in emerging markets, which are both more vulnerable to climate risk and face the biggest funding gap to build resilience.

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We also see possible impact for US-domiciled strategies that are explicitly marketing their focus on sustainability, impact, and ESG. We believe it now seemsunlikely that the SEC would push forward with rules requiring climate disclosure from companies. A reminder to investors that large US companies with operations in Europe are subject to EU sustainability-related disclosure requirements; thus, visibility of data should continue.

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We might see additional scrutiny on the use of ESG terms and an elevation to the national level of what has thus far developed as state-by-state legislation. Yet, given the state-level action of the past 24 months, we have seen managers of SI-focused strategies retain their focus on investment fundamentals tied to sustainability and spend less time on marketing. This might be positive for the maturation of the field overall, although near-term outflows and further consolidation of the number of available options are likely, in our view.

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Takeaways for investors

• A Trump 2.0 outcome is likely to represent more of a status quo for sustainable investing strategies and their performance than is widely anticipated by the market. We do not expect a wholesale reversal of the IRA and note that the investment thesis around the climate and energy transition remains robust. That said, near-term volatility is likely as the market digests the news.

• The outcome may not bode well for international climate negotiations, perhaps casting a shadow over the COP29 meeting which starts on Monday. It seems likely that President Trump withdraws the US from the Paris Agreement again, which could imperil US commitment to international climate funding. We believe this could impact emerging markets the most.

• For US investors, the state-level debate on ESG and sustainability-focused investments might rise up to the federal level, with potential more scrutiny from the SEC. This might result in further outflows in the near term. Over time, we would expect investors focused on sustainability to further focus on the fundamental investment drivers and move away from marketing efforts, which would be a step forward in the maturation of the space.

Implications for Europe​

The conclusive result of the US presidential election removes one key uncertainty for Europe’s leaders and companies, but it also ushers in a range of new ones. In terms of policies, President-elect Trump campaigned on a platform of lower taxes, deregulation, a tougher stance on immigration, and trade tariffs. Of these, the most consequential for the European economy is the potential for trade tariffs. US policy toward the war in Ukraine will also be in focus in the coming months, but beyond the already known fact that European defense spending will have to increase to NATO commitments (2% of GDP) in the coming years, it is too early to draw definitive conclusions.

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• The US is the single largest trading partner (measured on a value-added basis) for the EU, accounting for around 15% of exports, and around 18% for the UK (although the combined EU is larger). Thus, any pursuit of universal trade tariffs from the new US administration could have a noticeable and direct impact on demand for European exports. The extent of this is hard to gauge, as it is yet unknown whether President-elect Trump will pursue tariffs on European exports and, if he does, at what level after what is likely to be long and difficult negotiations that could result in short-term retaliatory measures.

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• It isn’t just direct trade. China is likely to be the initial target of trade policies from the new administration, potentially with much higher tariffs. This could result in weaker demand overall from China, which could, in turn, harm demand for European exports to the country. China accounts for around 10% of EU exports and 5% of the UK’s. Any fiscal policy response from China to counter US actions could limit the impact.

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• But a potential loss of consumer and corporate confidence if trade tariffs are pursued could have an even bigger impact on the economy. Weaker household demand and lower corporate investment in the short term are arguably just as big a challenge to European economies as tariffs. Overall, it seems the downside risks to our already modest expectations of around 1% growth for the Eurozone and around 1.5% for the UK in 2025 are increasing.

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• As for inflation, weaker growth could add to the disinflationary trends already under way. Moreover, a policy response from China that results in boosting production and the supply of goods to economies outside of the US could compound disinflationary pressure.

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• The implication for central banks is that the risks of further interest rate cuts beyond our base case are increasing. We currently expect the European Central Bank (ECB) to take interest rates back to the 2% neutral level as soon as June 2025. For the Bank of England, we look for a more modest cutting pace as growth is more robust and the UK government has announced large fiscal easing. However, risks to a faster pace of cuts in 2H25 are rising.

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Turning to equity markets, with around a quarter of European profits generated in the US, any escalation in trade tensions could have a negative impact on earnings. However, these sales to the US include services that would not be subject to tariffs, and most goods sold in the US are produced locally rather than exported. Therefore, the proportion of genuine exports to the US from Europe is much lower than that. We see the bigger risk from the impact on global trade from both the threat of universal tariffs and potentially much higher tariffs on goods from China specifically. In 2018-19, European equities on average fell 7% during the three episodes of US-China trade escalation, with China-exposed cyclical sectors, such as materials and consumer discretionary, falling by more than 10% on average. We therefore view a potential trade escalation as a negative risk for European equities.

Investing in Asia Pacific: Persistent fog

Introduction

Mr. Donald Trump will be the 47th President of the United States, with the Associated Press calling the 2024 election in his favor. The former president has secured the needed 270 Electoral College votes to become only the second person in American history to be re-elected to non-consecutive terms.

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Votes are still being counted, but the Associated Press has projected Republicans will regain majority control of the Senate with at least 51 seats. The GOP picked up seats in West Virginia and Ohio; protected against challenges in Nebraska, Texas and Florida; and is projected to win in Montana. Meanwhile, tight races in the House of Representatives will mean the overall composition of Congress may not be settled for a few more days or weeks. It is possible that close results in individual states may lead to recounts. That said, we believe it is unlikely that recounts will alter the apparent result of the election, and we believe that investors should make forward-looking investment decisions on the assumption of a Trump victory.

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For now, we stay Neutral on China and prefer Asia ex-Japan equities. At the time of writing, the Hang Seng index and its tech subindex are trading down close to 3% each, while the Chinese yuan has weakened (USDCNY +0.8%). Markets are now closely watching the response from China’s National People’s Congress (NPC) Standing Committee meeting, which concludes on 8 November.

In our view, while there is now more clarity on the US election outcome, a different type of uncertainty could persist past Election Day if volatility grows, and if hawkish policies emerge in tariff, trade, and tech restrictions. We bring you a special Investing in Asia Pacific report with our quick take on the likely impact on Asian assets, and how to prepare.

China

Macro: Trump has indicated he may impose up to 60% tariffs on all Chinese imports, though our primary outlook assumes a more measured approach. It is unlikely that these tariffs will be applied universally, immediately, and at the maximum rate. Instead, the actual tariff strategy will likely be phased and adjusted to align with what is feasible over time.

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• Investors are now likely to focus on the 14th National People’s Congress (NPC) Standing Committee meeting, which concludes on 8 November, for any shifts in response to Trump’s projected victory. We think Beijing’s upcoming stimulus package could be sizable, as hinted by China’s Finance Minister in October.

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• Overall, we anticipate an overall stimulus package of up to CNY 30 to 50 trillion in the coming 5-10 years. This would primarily involve local government debt resolution (about CNY 15tr in 2025 to 2028), property inventory destocking (about CNY 7tr), and social welfare support (about CNY 1-2tr annually). An initial package of CNY 2-4tr could be announced for these areas by year-end.

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However, with Trump’s projected win, we expect China to accelerate its planned stimulus more aggressively in the initial years. The size could be up to CNY 8-10tr for 2025, depending on the actual tariffs’ sequence and scale. Under a red sweep, the stimulus size could be closer to the high end of the range; under a split Congress, the size could be closer to the low end. Finally, the stimulus should aim to keep GDP growth at around 5%.

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Equities: We keep our Neutral view on Chinese equities for now. Trump’s projected victory challenges the near-term outlook for Chinese stocks, even though the revenue exposure of MSCI China to the US is less than 5%.

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But the risks here are well known. The short-term downside risks for the overall market would likely be led by export-reliant growth sectors, including consumer, IT, and internet names viewed as market proxies. Notably, if such risks materialize, we would consider adding more weight to the internet sector if it drops significantly from the current level. Amid potential volatility spikes, value sectors with high dividend yields (e.g., financials, utilities, energy, and telecoms) should stay resilient. If the market falls sharply and if the eventual policy response from the NPC Standing Committee meeting is constructive, we would consider a more positive view. We expect more volatility ahead while the market awaits concrete tariff announcements from a Trump administration, which would likely take place in mid-2025.

Asia

Macro: Under a Trump administration, we see Asian growth buffeted by short-term tariff-induced headwinds into 2H25. Smaller open economies are likely to be hit more than domestic-driven ones (e.g., India, Indonesia, the Philippines). But in the lead-up to the tariff imposition, growth could accelerate temporarily due to a period of export front-loading as US importers seek to stock up in advance of trade restrictions alongside stronger consumption. However, as tariffs are imposed, regional exports would face a step down; the degree depends on the tariff structure and timing. Another trend to watch is a potential acceleration in regional trade as corporate investments (manufacturing and construction) ramp up to expand regional supply-chain capacity.

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But the key reason why we do not expect more than a 1% GDP slowdown (i.e., a more extended trade disruption) is that unlike 2018-19, Asia and the US are easing policy, not tightening. Also, we see a more durable outlook for US growth, not a steep slowdown. These factors—plus China’s stimulus and race to upgrade its industries—are sAura tantial cushions to Trump’s proposed tariffs. Regional policy interest rates should continue to be lowered by around half the amount in the US, supporting domestic growth.

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Equities: We retain our Attractive view on Asia ex-Japan equities. The asset class benefits indirectly from mainland China’s stimulus. Moreover, the Fed easing cycle, South Korea and Taiwan’s structural AI growth story, and resilient growth from domestic-oriented markets (India and Southeast Asia) could still see double-digit earnings growth for the region in 2025. Indeed, the price action today reflects this, with India and Taiwan equities as early outperformers.

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India’s Nifty 50 is up more than 1%, as the country is less exposed to trade risk. Additionally, after the recent pullback, we believe current levels offer an attractive entry opportunity to own a structural story. Similarly, Taiwan equities are up 0.5% today, as the rally in the Nasdaq 100 Futures index reflects investor appetite for structural AI trades in Asia.

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Conversely, we remain Neutral on Japanese equities. In Japan, the Nikkei 225 rallied 2.1% today, negating concerns about the impact of potential Trump tariffs. While the rally appears to be driven by yen weakness, we think profit growth for Japanese equities is likely to slow, capping further upside. We acknowledge that fiscal measures by the Chinese government would positively impact Japanese equities if China's EPS grows, given that China accounts for a high single-digit percentage of Japanese companies' sales. However, the timing of any significant tariff increase on Chinese imports announced by Trump could lead to a negative share price reaction. When Trump first mentioned tariffs on Chinese goods in early 2018, the TOPIX had a muted reaction, but as trade tensions worsened, the TOPIX declined by over 10% in 4Q18. That said, in 2018, there were no supportive measures from the Chinese government.

Bonds

Asia IG and HY: We think investors should continue to position in Asia investment grade (IG) bonds. With the jump in rates, Asia IG yields look attractive (at 5.4%) and are a good avenue to lock in stable carry, in our view. We expect healthy total returns in the next 12 months, given a robust fundamental and demand/supply backdrop. We also see limited IG spread widening even if protectionist US policies materialize. Most USD bond issuers in Asia are domestically focused, hence any fundamental impact should be muted.

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Within China IG, we see minimal impact on state-owned enterprises (SOEs) and financials. The chemical, semiconductor, hardware, and consumer technology sectors could see some impact from protectionist measures. However, with their broadly sound fundamentals, any weakness could be a buying opportunity. Moreover, overall China IG technicals are now much stronger than in Trump’s last term, due to negative net issuance from Chinese issuers for over two years. This has reduced the index weights for China in both IG and high yield (HY) indices. For example, China’s weight in the index has dropped from over 50% in 2018 to 34% presently. We think this could fall to around a quarter of the IG index by 2026 and could support spreads in the next six months. Asia HY’s reaction could also be limited, in our view. We see very little fundamental impact for Asian HY issuers from potential Trump policies. Stimulus measures from China’s NPC meeting and the effective implementation are more important drivers for mainland China HY. We continue to prefer bottom-up opportunities in Macau gaming and commodity names.

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Asia local currency bonds: We see reduced upside for the asset class with Trump’s projected win. While we still expect positive returns in the next 12 months from yield carry, rates compression may be more limited given that Asia central banks could be more constrained in their rate cuts. Even though inflationary pressures in Asia are low, Asian FX could face added risks if Trump enacts protectionist policies.

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Chinese government bonds: The asset class remains unappealing to us, as the yield carry remains low, and FX returns from CNY could see further downside given Trump’s projected victory. Should China surprise with a big fiscal package, this could also cause some upward pressure on long end bond yields. Overall, we see a negative to low-single-digit total return for the asset class in the next 12 months.

Currencies

USDCNY: The USDCNY has risen to 7.17 (from 7.10) at the time of writing. We see further upside and have adjusted our forecasts to 7.3 (Dec 24), 7.4 (Mar 25), 7.5 (Jun 25), 7.5 (Sep 25), from 7.2, 7.0, 7.0, 7.0 previously.

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In the coming months, the People’s Bank of China (PBoC) is likely to contain the spike in the USDCNY by keeping the USDCNY official fixing relatively stable. That said, the USDCNY fixing rate might not be completely unchanged, especially if we see broad USD strength.

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Over the medium term, the risk for the USDCNY will likely be skewed toward the upside. History shows that during the 2018-2019 trade war, the USDCNY rose in a step-fashion as the US imposed tariffs on China's goods in a staggered manner. While the PBoC could contain the rise at around 7.5, we would refrain from seeing this level as a hard “line in the sand”.

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USDJPY: The USDJPY has risen from 151.5 to around 154 at the time of writing, tracking the rise in US bond yields. Based on sensitivity analysis over the past three years, a 10bp widening of the US-Japan 10-year yield differential coincides with a one-yen rise in the USDJPY exchange rate. In this context, a near-term spike in 10-year US yields toward 4.8% could see the USDJPY test the 158 level.

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We believe a USDJPY spike toward 158-160 levels is unsustainable and see such levels as opportunities to tactically sell USDJPY or sell the upside price risk for yield pickup. Over the medium term, we still expect the USDJPY to fall back below 150, as the Fed cuts rates and the Bank of Japan pursues further policy normalization over the course of 2025.

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AUDUSD: The AUDUSD fell on the back of Trump's projected victory, with risks of higher China trade tariffs a key downside risk to the pair over the months ahead. Conversely, we await stimulus details from the China’s NPC meeting, with greater stimulus supportive for the AUD and commodity prices. While we see modest downside risks to the 2025 forecasts for AUDUSD if US-China tensions rise, we believe the recent sell-off already factors in these recent events to some degree.

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Moreover, there is a risk that the Reserve Bank of Australia could be on hold for longer due to domestic factors, which is supportive of the AUDUSD around the high 60s. While we would avoid outright long positions until greater clarity emerges on China and the composition of the US Congress, we continue to recommend using the higher volatility to sell downside in the pair at 0.63 or below.

USDSGD: The USDSGD rose by around 1% from 1.317 to 1.331, against a backdrop of broad USD strength. In the near term, a rise toward 1.35 is possible if major currencies such as the CNY, JPY, and EUR weaken further. On a medium-term fundamental perspective, more protectionist trade policy under a Trump administration would also be unwelcome for the SGD, given Singapore's dependence on global trade.

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But notwithstanding near-term USDSGD upside risk, we regard levels above 1.35 as attractive to tactically sell USDSGD or sell the upside price risk for yield pickup. We believe the USDSGD has room to decline over the medium term for several reasons: (1) The Fed should continue to cut rates in 2025, which steadily erodes the USD’s yield appeal; (2) During the trade war between June 2018 and September 2019, the SGD weakened by a moderate 3% versus the USD, even as the CNY came under heavy depreciation pressure; (3) We expect the Monetary Authority of Singapore to retain its policy of gradual currency appreciation, which should support the SGD.

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Commodities

Gold: Gold prices ticked lower following the sharp USD rally, and US rates stepped higher. While the reaction is surprising, markets could be assuming that campaign rhetoric will not fully translate into policy. Historically, gold tended to rise ahead of the election of a Republican president and remain relatively flat in the post-election period. However, this time, with ongoing geopolitical uncertainties including trade-related risks, potentially higher US inflation, and expectations for continued central bank buying, we reiterate our view that gold remains a hedge within a portfolio context. We maintain our USD 2,900/oz target for September 2025 and recommend an around 5% allocation to gold in a USD-based balanced portfolio.

Oil: The USD rally and a belief that Trump would usher in higher US oil production has had a negative impact on oil prices so far. In our view, the market remains too focused on the impact of potential tariffs, its negative read-through to economic growth, and the impact on oil demand. But as before, Trump could tighten sanctions on key oil producers, like Iran and Venezuela, which would be price supportive. As such, we retain our moderately constructive outlook for oil prices for now. We highlight that OPEC+ retains its cautious outlook and supply discipline, while ongoing monetary and fiscal stimulus measures in China and the US could shore up demand.

Trump President, Senate Republican, House still uncertain

6 Nov 2024

What’s happened?

Donald Trump will be the 47th President of the United States, with the Associated Press calling the 2024 election in his favor. The former president has secured the needed 270 Electoral College votes to become only the second person in American history to be re-elected to non-consecutive terms.

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• Votes are still being counted, but the Associated Press has projected Republicans will regain majority control of the Senate with at least 51 seats. The GOP picked up seats in West Virginia and Ohio; protected against challenges in Nebraska, Texas and Florida; and is projected to win in Montana. Meanwhile, tight races in the House of Representatives will mean the overall composition of Congress may not be settled for a few more days or weeks.

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• It is possible that close results in individual states may lead to recounts. That said, we believe it is unlikely that recounts will alter the apparent result of the election, and we believe that investors should make forward-looking investment decisions on the assumption of a Trump victory.

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At the time of writing, S&P 500 futures are up by 2.3% and Russell 2000 small-cap index futures are up by around 6%, likely on anticipation of stronger domestic growth, increased M&A activity, an extension to personal tax cuts, and hopes of lower corporate taxes. The prospect of a clear-cut election outcome may also be driving futures higher, given reduced uncertainty about the future.

Ten-year US Treasury yields have risen around 18 basis points to 4.44% at the time of writing, in anticipation of higher nominal GDP growth and higher fiscal deficits. The US dollar has strengthened by 1.7% against the euro. Gold is down around 0.7%, at the time of writing.

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With a possible increase in trade tariffs under a Trump presidency, the Hang Seng index fell 2.2% and the Chinese yuan has weakened (USDCNY +0.4%). Elsewhere in Asia, Japan's Nikkei 225 index rose 2.6% amid a 1.5% decline in the yen. The Euro Stoxx 50 is up 0.9%. The Mexican peso is trading down by 3% against the US dollar.

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What will it mean for policy, the economy, and geopolitics?

Trump campaigned on a platform of extending personal income tax cuts, lower corporate taxes, deregulation, trade tariffs, immigration controls, and re-assessing America’s role in global affairs. If the Republicans secure control of Congress, the president would have greater scope to pursue his policy agenda. That said, narrow Congressional majorities could constrain some policy measures, especially given already large federal budget deficits.

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We believe that tariffs are the most potentially consequential policy from an economic perspective. The mooted 60% tariff on imports from China and a 10% tariff on imports from the rest of the world could make much of US-China trade unviable, reduce US domestic demand and corporate profits, and lead to lower GDP growth around the world, particularly in China. Such tariffs could also contribute to higher inflation in the US. LEARN MORE