CFS Market Insights: November 2024

Welcome to CFS Market Insights. So this market insight is, first of all, going to focus on the outcome of the US presidential election, where we have seen President-Elect Trump being given a very clear mandate.

It's important to note that not only has he won the Electoral College, he's won the popular vote, he has won the Senate, and at the time of recording, it looks as if he will take the House of Representatives. 

This is important because it takes away any uncertainty about the election outcome. A couple of weeks ago, there were some concerns that if there was any ambiguity about the election outcome, that markets may find that difficult to digest, and you'd see some real volatility in investment markets.

There are four things that we're focusing on from an investment perspective. The first one concerns the labor market and the supply of labor into the US economy. The Trump administration's policies around migration, and the potential for deportation of illegal aliens, we think, is likely to add pressure to the labor market over the next 1 or 2 years.

Secondly, president elect Trump has made it very clear that he favors increasing tariffs on a number of key trading partners for the US. A primary focus has been China, but he's also made aggressive comments about tariffs, for the European Union as well.

Whilst right now it's difficult to anticipate how these will be implemented, if the full number of tariffs that Trump talked about during the election campaign were enforced, it's likely that growth in the US could be impacted negatively by between half and 1%. But importantly, inflation could move up by 1 to 2% because of the impact of tariffs going forward. 

We think that this is going to be an important thing for markets to digest in the coming months, particularly the impact on fixed income markets.

The third element to focus on is the potential implications on fiscal policy of Trump's tax cuts, both at a personal and a corporate level. It's possible that with total control of Congress and the full implementation of those tax policies, you could see the budget deficit move up to about 140% of GDP.

We think this explains the reason why you've seen bond markets sell off, whilst equity markets have performed very well since the announcement of the election results.

The fourth thing that we think the markets will have to start to contend with is a movement from a multilateral world, to one where the Trump administration looks at things through a bilateral lens.

The first administration of Trump demonstrated that he took a very commercially orientated and business focused way to transacting geopolitics. This fits into a narrative of strategic decoupling of the US from the rest of the world.

It's difficult to anticipate how these elements will play out. What we do think is likely is that the range of potential outcomes, whether or not it's around geopolitics or around economics, broadens and becomes slightly more difficult to predict.

All in all, we think that these factors are more likely to be inflationary, and that we will see increased volatility, both of inflation data and potentially of interest rates, over the next 1 to 2 years, as Trump's full policies are implemented.

We have spoken before that we believe that we're entering a period where inflation data is going to continue to be more volatile than we have seen historically.

The mandate that Trump and his administration have been given by the American people means that we think that that has got increased likelihood going forward.

We've anticipated some of the implications for this. For example, we have very little exposure to government bonds in our portfolios.

It also explains why we've increased our exposure to private debt in our portfolios, an allocation that we think will fare well regardless of the inflationary environment that we see in either the US or more broadly.

Moving things close to home. We continue to see an environment where Australian interest rates continue to move in a different direction from those in Europe and the United States.

The RBA is still very focused on inflation, and it's true that inflation domestically has not come down as quickly as we've seen in parts of Europe and also the US.

It's important to remember the Australian rates were never as restrictive as those in the US. So it does make sense that it's slightly harder for Australia to get inflation under control.

Inflation is also persisting due to asset growth, particularly in residential housing, and also the impact of low productivity.

The discussion around productivity here in Australia is not a new issue, and both the current and previous governors of the RBA have raised this as an issue, particularly as productivity is well below what we've seen in other developed economies.

It's noteworthy that mortgage lending volumes have actually remained quite strong, indicating intense competition amongst the banks.

So in the short term, we continue to believe that the RBA will maintain interest rates where they are, in contrast to the declines that we've seen in the US and Europe.

Authorities will want to make sure that inflation has moved down on a more permanent basis before they embark on their own rate cutting cycle.

Thanks for watching CFS Market Insights. See you next time.