Stock markets on the upswing after the US election

The re-election of Donald Trump as the 47th President of the United States, the collapse of the German ‘traffic light’ coalition and the second interest rate hike by the US Federal Reserve have recently dominated events. Trump's victory and the expected complete control of Congress open the door to tax cuts, deregulation and a stricter trade policy. At a time when there is no more spare capacity in the US economy, the impact of such policies would push inflation back up in the US and probably boost US growth somewhat over the next few years. The stock markets welcomed the short-term reduction in uncertainty about the direction of future US policy. US equities reached new all-time highs and recorded their biggest one-day gain after an election in a century. The leading US index, the S&P 500, rose by 4.7 per cent in its best week since October 2022.

Yields on 10-year US government bonds ended the week after the US election at around 4.3 per cent, not far from their four-month highs. Increased US budget deficits are a factor that we believe underpins inflationary pressures and should drive long-term government bond yields higher over time.

Even if the future direction of US policy is now more predictable, medium-term uncertainties remain. Investors must continue to navigate an unusual environment in which completely different scenarios are conceivable. are conceivable. In recent months, we have repeatedly experienced sudden changes of direction on the capital markets. The spectrum ranged from enthusiasm about the development of artificial intelligence (AI) to fears of recession. The lack of a macroeconomic anchor could explain why it doesn't take much to trigger sharp fluctuations. The data dependency emphasised by central banks, for example, does not provide a fixed reference point for short-term monetary policy developments and makes markets more susceptible to sharp reactions to individual data points. This can be seen, for example, in the unusually strong fluctuations in 10-year US government bond yields. Increased volatility will therefore also be a companion for the coming year.

We favour US equities

We remain positive on US equities and see further potential despite the seemingly ambitious valuations. The contrast to the sluggish economic growth and equity performance in Europe remains striking. We remain moderately overweight in the technology sector and continue to focus on structural growth trends such as digitalisation, artificial intelligence and cloud computing. We also currently favour sectors with higher debt capital requirements, as these should benefit from further interest rate cuts. These include cyclical companies in particular, which are valued more attractively than defensive stocks. Cyclical equities have recently experienced significant corrections, particularly due to weaker macroeconomic indicators and the weak economy in China. After China recently announced some details of its ambitious stimulus package, we see opportunities for selective buying in these sectors if a soft landing is achieved. Sectors such as construction and certain industries could be on the verge of a recovery. Business models that benefit from structural trends such as energy efficiency and infrastructure in addition to an economic recovery are also particularly attractive.

Overall, we see good opportunities for the equity markets over the next few years. Falling interest rates will lead to lower financing costs and therefore higher corporate profits. Technological innovations will remain a positive driver. Donald Trump will also set many fiscal policy priorities that will stimulate the US economy. This is because he measures his political success in terms of economic development. We recommend expanding equity investments in stages. The first one this year.

Attractive yields on government bonds

In absolute terms, government bond yields look attractive compared to the last decade. We favour shorter duration investments, which should hold up better if inflation surprises to the upside. In corporate bonds, we favour investment grade issuers and asset backed securities whose relative valuations are attractive given the strength of the consumer.