A timid October has just ended on the financial markets, with a slightly positive performance of global equities at +0,50%*. It should be noted from the outset: the currency clearly has a different impact in Europe than on the other side of the Atlantic. In dollars, equities lost nearly 2% over the same period. As a result, this currency effect has proved favourable to European investors (the dollar appreciated by 2,30% against the euro) and helped to mask the fall in equity prices in dollars.
In geographical terms, the US markets nevertheless held up well (-0,75% in USD, or +1,85% in EUR), while their European and emerging market counterparts lost -3,26% and -4,45% respectively.
On the fixed income front, it was a rather difficult month, with rates moving up globally. Benchmark 10-year rates in the US and Germany rose by around 60 and 40 basis points respectively. Similar movements were observed on 2-year rates, despite central banks’ efforts to reduce their key rates. Several factors can explain these sharp movements: US economic resilience, not to mention the large budget deficit, which is likely to remain high based on the economic programmes of the candidates for President.
A degree of unease and volatility in the markets is customary before US elections. This is all the more understandable given the high level of polarisation and with polls projecting a very close race between the two candidates. This increased fears that the results would not be accepted by the losing party.
With a fairly clear victory for Donald Trump, the worst scenarios have been avoided. The smooth running of the elections, as well as the pro-business and pro-market policies promised by the incoming President, significantly boosted sentiment. The famous “Trump Trade,” which consists of favouring US equities on the basis of higher nominal growth, gained popularity as soon as the first results were announced. With US sovereign yields and the dollar rising sharply, gold, which had been on the rise for several months, lost nearly 3% in the post-election period.
Returning to economic fundamentals, it should be noted that the most recent growth figures have been reassuring. According to initial estimates, the US economy grew at an annualised rate of 2,8% in the third quarter, which is still well above the growth potential estimated by the US Federal Reserve (Fed) at nearly 2%.
In Europe, expectations are naturally tilted to the downside, but the published figure (0,40% on a quarterly basis, i.e. 1,60% annualised) seems entirely adequate. German growth surprised on the upside: while expectations were at -0,1%, the first estimate reached 0,2%. Despite this solid figure, the German economy continues to struggle. The plant closures announced by Volkswagen, a first in the company’s history, point to a broken business model.
As uncertainties around the election dissipate rapidly, it is preferable to overweight equities in order to reap the benefits of a potential relief rally. This overweight is achieved through US equities, which are the most likely to benefit from Trump’s economic and fiscal policies. This is true insofar as economic conditions remain favourable and the financial health of companies is good. The sectors that continue to be favoured are Technology and Communications Services, the big winners in the artificial intelligence theme, as well as US banks, which benefit from potential deregulation and future tax cuts, followed by Healthcare, benefiting from stable earnings growth.
In terms of fixed income, the budget deficit and strong growth make duration unattractive on US bonds. The deficit is also a problem in Europe, but growth remains weak, which boosts the argument for slightly longer duration than that of US bonds.
*Performances are calculated in euros.
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