Schroders Investment: What impact will Trump's victory have on the global economy and stock market?

Zhitong
2024.11.08 06:28
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Schroders economist George Brown stated that a Trump victory would have a re-inflationary effect on the U.S. economy, expecting the Republican Party to maintain a majority in the House of Representatives. Trump's promises to cut taxes, ease regulations, impose tariffs, and tighten immigration policies could lead to increased inflation, affecting the Federal Reserve's interest rate decisions. Schroders will raise its economic growth forecast for 2025 and holds a positive outlook on the U.S. stock market, although trade risks remain a major variable

According to the Zhitong Finance APP, George Brown, a senior U.S. economist at Schroders Investment, stated that the Republican Party is expected to maintain its majority in the House of Representatives. Therefore, Trump has a considerable opportunity to implement his policy agenda. He has promised further tax cuts and deregulation, while also raising tariffs and tightening immigration policies, a series of policies that will have a re-inflationary effect on the U.S. economy.

George Brown noted that in what initially seemed like a closely contested election, Trump ultimately succeeded in defeating Kamala Harris, winning a decisive victory and becoming the second U.S. president to be elected non-consecutively. The only uncertainty that remains is whether the Republican Party can control both houses of Congress simultaneously. Although they have regained control of the Senate, the situation in the House of Representatives remains unclear, especially in the highly competitive districts of California and New York.

George Brown anticipates that Schroders will further raise its economic growth forecast for 2025 later this month, up from the current 2.1%. The August forecast was based on the market expectations at that time, which anticipated a divided government under Harris's leadership. Inflation may prove to be more stubborn, further supporting Schroders' view that the Federal Reserve is unlikely to cut interest rates significantly as it has suggested. According to Schroders' analysis, the neutral interest rate is around 3.5%, and Trump's return to the White House may require the Federal Reserve to maintain rates above this level.

Johanna Kyrklund, Chief Investment Officer at Schroders Investment Group, stated that Trump's victory in the U.S. presidential election has not shaken Schroders' positive outlook on global equity markets, particularly its continued preference for U.S. stocks. Reflecting on his previous term, Trump viewed the Dow Jones Industrial Average as a symbol of his policy success. Against this backdrop, Schroders still expects the U.S. economy to achieve a "soft landing," and fiscal policy is likely to remain supportive.

Johanna Kyrklund pointed out that trade risks are a major variable. We may soon hear Trump's statements on this matter. In the short term, Trump's protectionist trade stance will support the dollar but simultaneously put pressure on economic growth outside the U.S. Schroders anticipates that the Chinese government will continue to implement stimulus policies to offset any negative impacts.

However, the situation in Europe is becoming increasingly concerning, as it may fall into a more hostile trade environment while lacking the unified leadership needed to address this challenge. Schroders continues to encourage holding bonds, for the same reasons as before, namely to achieve stable income. However, due to the potential impact of expansionary fiscal policies, the utility of bonds as a diversification tool remains challenged.

Overall, Schroders still believes that the risk of a "hard landing" for the economy is low, but the trade and fiscal policies of this administration may increase the risk of rising inflation in late 2025.

Fixed Income: The U.S. election may bring higher yields and sustained dollar strength

James Bilson, fixed income strategist at Schroders Investment, stated that data shows strong recent economic growth in the U.S. Against this backdrop, any easing of fiscal policy will make it more difficult for the Federal Reserve to achieve and maintain its inflation targets, increasing the risk of an "unlanding" economy. Therefore, Schroders believes this outcome will lead to rising yields, pressure on U.S. bonds, and a strong dollar In the past few weeks, the market has shown significant changes in this direction.

In terms of trade, policies may fluctuate in the medium term. Schroders expects that concerns about the global trade cycle will negatively impact regions such as Europe in the short term, leading to a weakening of the euro against the dollar.

Lisa Hornby, Head of U.S. Fixed Income at Schroders, stated that the market's initial reaction was a rapid rise in U.S. Treasury yields, making the yield curve steeper (i.e., the gap between short-term and long-term interest rates widened). Schroders believes that the yield range for U.S. Treasuries is likely to have shifted upward, and unless the U.S. economy falls into recession, the likelihood of the 10-year Treasury yield falling below 3.5% again is low.

Similarly, historical experience shows that when one party controls all branches of government, the yield curve typically becomes steeper. Therefore, Schroders expects this trend to continue. Credit spreads (i.e., the additional premium of corporate bonds relative to risk-free rates) narrowed significantly after the election results became clear, reflecting the market's full anticipation of a more favorable policy environment for corporations (such as potential corporate tax cuts and regulatory easing).

Schroders anticipates that as Trump begins to appoint his core government team, the impacts on certain industries will become clearer. Other parts of the fixed income market have shown more differentiation. In emerging markets, investment-grade and high-yield spreads have performed strongly. The economic growth outlook in the U.S. helps drive economic growth in emerging markets, but pressure points will focus on emerging market currencies.

Trump's pro-growth policies seem to be pushing up the Federal Reserve's neutral interest rate, which Schroders expects will support a stronger dollar in the short term. Nevertheless, the long-term structural imbalance issues in the U.S., particularly the fiscal deficit, may ultimately exert pressure on the dollar over the long term.

While the election is a hot topic, it is not the main driver of investment positioning. Schroders believes that the biggest challenge investors currently face is that the trade-off between risk and return has changed significantly. Specifically, the return required or accepted by investors for each unit of risk has sharply declined compared to historical levels. Despite solid corporate fundamentals, credit spreads are at the bottom 10% of historical ranges. This indicates an asymmetry in the current risk/return framework, with the probability of downside risk far exceeding the upside potential. The potential policy changes from a Republican sweep increase uncertainty, further suggesting that the market should incorporate more risk premium rather than reduce it.

Emerging Market Stocks: Tariff Policies May Pose Risks

Tom Wilson, Head of Emerging Market Equities, pointed out that the Trump administration may have a predominantly negative impact on emerging market stocks. Additionally, the U.S.'s high tariff policies may prompt China to adopt more significant stimulus measures to defend against the impact on its economic growth.

Trade tariffs and other policies from the Trump administration may lead to inflation in the U.S. Schroders expects this will result in a stronger dollar, rising inflation, reduced Federal Reserve easing policies, and an increase in U.S. yield curves. These changes are generally unfavorable for emerging market stock returns, while also putting pressure on currencies and limiting central bank policies.

Compared to other emerging markets, India is less exposed to the risks of Trump’s policies, making it potentially defensive in the short term. In China, the market still has strong policy support. Despite the uncertainties in trade, China may still introduce more stimulus measures, so Schroders remains cautious in its neutral outlook Global Equities: Corporate Tax Cuts and Regulatory Easing May Support U.S. Stocks

Simon Webber, Head of Global Equities at Schroders, expressed optimism about the 12-month outlook for U.S. stocks, primarily supported by moderate earnings growth. However, if the yield curve continues to rise (i.e., bond yields increase), this will begin to exert pressure on stock valuations. Trump's victory may pose certain risks to corporate earnings, particularly as tariff policies could adversely affect the profit margins of industries reliant on imports from China. Additionally, anticipated restrictions on immigration may drive wage growth, especially in sectors such as consumption and construction.

These factors will further exacerbate inflationary pressures. Companies with pricing power (i.e., those able to raise prices without harming demand) are likely to perform better in this environment, although the risk of suppressed demand remains.

On a more positive note for U.S. corporations, Trump's proposed corporate tax cuts will undoubtedly be a favorable factor. Regulatory easing should also provide support for U.S. stocks, particularly in sectors such as large banks and artificial intelligence (AI), which still possess considerable potential beyond larger tech companies. In fact, in some cases, structural investment themes may thrive during a new Trump administration, as the U.S. may further encourage innovation through regulatory easing to maintain its technological leadership.

Schroders believes that under Trump's leadership, the U.S. will withdraw from most global climate change initiatives. This could suppress U.S. commercial investment in key climate technology value chains and shift the focus of the global energy transition to other regions, particularly China and Europe, where the pace of energy transition will continue to accelerate.

Energy Transition: Green Incentives Face Challenges, but Cost Advantages of Renewable Energy Remain Strong

David Boyce, CEO of Schroders Greencoat North America, pointed out that over the past 15 years, the cost of generating electricity from wind and solar has significantly decreased, now comparable to the variable costs of fossil fuels. From a cost-effectiveness perspective, the shift to renewable energy has become an irreversible trend for utility companies.

President-elect Trump has hinted at a desire to end economic support for the clean energy industry, but he may find it difficult to unilaterally repeal the Inflation Reduction Act. To terminate tax incentives for green energy, support from the U.S. Congress is necessary, and the new president may not easily secure this support, as the broad economic stimulus effects brought about by the act cannot be ignored.

Alex Monk, Portfolio Manager of Global Resources Equities at Schroders, stated that the Trump administration's policies may further drive inflation upward. Capital costs are a key driver of the development of sustainable energy projects and consumer demand for clean energy products. Therefore, reduced investment and project delays will exacerbate the risk of a slowdown in consumer adoption of core technologies such as electric vehicles, rooftop solar, and heat pumps.

Despite the short-term policy uncertainties brought about by a Republican sweep, Schroders believes that the risk of fully repealing important measures such as the Inflation Reduction Act is relatively low In addition, policy is not the only driving force behind the energy transition, and the United States is not the only market for these companies. Schroders has consistently emphasized that there are three long-term driving factors for the global energy transition: 1) continuous improvements in cost and technology; 2) growing demand from consumers and businesses for sustainable energy products and services; 3) long-term policy support. In this context, although changes in the U.S. policy environment will undoubtedly pose challenges, this should not obscure the focus on other forces driving investment in this field.

In summary, Schroders believes that the valuations of energy transition-related stocks have fully reflected various potential policy changes and market fluctuations