Research Insights | Market Commentary November 2024
In November all eyes (and markets) were focused on the US election, and with a Trump win it set the tone for a rally in developed markets. US equities posted a strong gain of 6% in USD terms with all sectors and market captilisations up. Asian equities faired worse as the potential tariffs on Chinese exports into the United States saw Asian equities and, in particular Chinese equities, sell off on negative sentiment.
Further comments on the US election and implications are outlined below.
The US Federal Reserve continued to lower cash rates with a cut of 25bps in November that now sees the target cash rate move to a 4.50%-4.75% range. The Bank of England also lowered cash rates by 25bps to 4.75%. The Reserve Bank of Australia left cash rates unchanged in November at 4.35%. The RBA noted that “Inflation has fallen substantially since the peak at the end of 2022 as supply chain issues have abated and higher interest rates have been working to bring aggregate demand and supply closer to balance. Underlying inflation in the September quarter is still too high. While trim mean inflation declined to 3.5% over the year it was little changed at 0.8% in the quarter”.
Australian large cap equities rose by 4.0% in the month led by the IT sector (+10.5) and Utilities (+ 9.1%) with the only negative sectors being Energy (-0.7%) and Materials (-2.6%). Currency hedged global equities rose by 4.9% and with the Australian dollar falling versus the US Dollar by 1.0 cent (-1.1%) to close the month buying US$0.6512, unhedged equities returned 5.2%.
With major central banks easing cash rates further in the month it was no surprise to see bond yields fall. The Australian 10-year government bond yield fell by 16bps to 4.34% and the Australian 2-year government bond yield fell by 9bps to 3.95%. The US 10-year government bond yield fell by 12bps to close at 4.17% and the US 2-year government bond yield fell by 2bps to 4.15%.
What are the implications of a second Donald Trump presidency?
The US election in November resulted in a resounding victory for Republicans with Donald Trump elected President and Republicans also controlling the House of Representatives and Senate. The so-called “Red Sweep” should allow for a relatively easier passage for laws to be passed and change to be implemented by Republicans. However, the window to enact change may be relatively short with mid term elections due in 2 years and the Republican majority in both the House of Representatives and Senate small.
Policy agenda
The policy agenda of President Trump and Republicans is key to determining any market implications. To this end, the key areas to focus on are summarised below:
Immigration – Restricted immigration access to the US, tighter border controls and potential deportation of undocumented immigrants are all policies flagged pre-election by the Trump campaign.
Move to “small” government – Trump has promoted a move to make government more efficient by decreasing red tape and reducing wasteful spending. Elon Musk will co-chair a newly created Department of Government Efficiency (DOGE) with an initial target of US$2 trillion in government spending cuts.
Tax Cuts – Trump has stated he will seek to make 2017 personal tax cuts which are due to expire next year permanent. In addition, he has promoted a cut to the corporate tax rate with domestic profits to be taxed at a lower rate than international profits for corporations thereby encouraging companies to bring back manufacturing to the US.
Trade – One of the more contentious policies is to impose large tariffs on imports from China and to a lesser extent other countries. In addition to tariffs there may be further restrictions to trade in the form of capital controls, which effectively restrict inflow and outflow of foreign capital.
Foreign Affairs/Geopolitics – Trump has stated he will quickly resolve the Russia/Ukraine conflict and would move to find a resolution in the Israel – Hamas/Hezbollah conflict (although at the time of writing a ceasefire has been negotiated between Israel and Hezbollah).
It is difficult to quantify the economic implications of any policy changes given we don’t know the timing of implementation and any possible retaliatory actions in relation to tariffs. For instance, deportation of undocumented immigrants has the potential to create a labour drain and tighter jobs market. However, if aggressive spending cuts are implemented on government departments this may see a significant reduction in employees and increase the unemployment rate for the US. In a broad sense the Trump policy agenda is expected to be supportive for US economic growth, complicated for international trade relations and carries the risk of higher inflation in the US.
US investment markets have initially been bolstered by the “Red Sweep” with US stocks, Bitcoin and the US dollar all moving higher in November. On the flip side, Chinese equities fell in November as investor anxiety regarding tariffs was increased. US bond yields moved higher during November. Longer term, the implications are less clear with some initial thoughts summarised below.
US Equities – A boost to profitability because of a potential cut in the corporate tax rate would be positive. Whether companies choose to use the increased profits to re-invest in growth or simply buy back shares will have very different implications for longer-term economic growth and share market performance. There may be opportunities for smaller US based companies to gain market share without competing head-on with cheaper imports with some industries advantaged more than others.
International equities – Trade is likely to be complicated by tariffs and capital controls. For instance, if heavy tariffs are imposed on Chinese imports to the US will the Chinese move to redirect trade to other jurisdictions or retaliate by imposing tariffs on US imports? If trade flows are re-directed we may see protectionist policies enacted across a wider number of countries and an increasing importance on bilateral agreements between nations.
US government bonds – Higher inflation (particularly as a result of tariffs) together with a US budget deficit that is likely to increase will see upwards pressure on US government bond yields. Investors should watch for any signs of rating agencies becoming more concerned about the US government deficit.
US dollar – Likely to continue to be supported as capital flows, attractive bond yields and relatively attractive economic growth all provide support. Finally, the unconventional nature of Donald Trump will result in surprises for investment markets over the next four years. Whilst there has been an initial positive reaction by investors to the Republican election victory investors should be mindful of valuations and ensure they are adequately diversified to best navigate the road ahead
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