The overperformance against European stocks has been particularly remarkable. While US stocks were up more than 9% over November, EMU stocks ended the month flat.
Trump's return has also had a massive impact on bond markets, pushing yields upwards. Tariffs will increase the price of imported products. Immigration controls will reduce the availability of labour in the US economy at a time when unemployment is already low. Fewer taxes and higher wages will boost consumption. These policies indicate increased inflation in the USA, pushing interest rates up. 10-year treasuries are again yielding around 4,3%. And when the USA, with its massive (and increasing) debt, is willing to pay more to finance itself, the rest of the world has no choice but to follow.
Trump’s policies will pose a massive challenge to countries struggling with weak domestic demand. Many of these see exports to the USA as a beacon of light in an otherwise bleak outlook. They depend on US markets for their exports to look good and for their economies to stay afloat.
As tariffs are imposed on most US imports, other countries will invariably find themselves competing with one another for alternative markets. This will lead to cutthroat competition between exports, each vying for a competitive advantage.
Competitive currency devaluations are inevitable and could lead to full-blown currency wars. Currency markets will likely experience increased turbulence, during which currency fundamentals, inflation, and the evolution of Purchasing Power Parity will be of little importance.
We also believe that, as the world becomes increasingly turbulent, commercial relations look frail, and the world’s leading stock market looks expensive, it is time to adopt a more prudent approach. This is made easier because yields have increased somewhat, strengthening the case for more extensive bond holdings.
Global economic growth will be in the spotlight in the coming months, with the US economy playing a key role. We will continue to monitor the evolution of the different markets and define suitable strategies to achieve good results according to our base strategy for a balanced portfolio.