Donald Trump’s US presidential win, together with a Republican sweep of the US Congress, puts Trump in a strong position to implement his economic agenda. As his campaign proposals were very broad-brush, it is too early to assess how his policies will play out. However, he has made clear that trade tariffs, immigration controls, regulatory easing and tax cuts are priorities.

Despite the uncertainty about which policies Trump may implement, a consensus outlook has developed based on first-term governance, his rhetoric over the past four years and pledges he made during this year’s campaign. Broadly, that consensus suggests reflation, a strong US dollar, higher interest rates, reshoring and oil-supply growth, to name a few, with the potential for material downstream effects on broad asset classes and equity sectors.

Our multidimensional approach allows investment team members to exploit an unusually wide and innovative range of inputs in their idea generation, and it shapes the creation and management of our strategies. In order to assess the consensus view’s validity, we gathered our multidimensional research and portfolio management teams to debate market assumptions and offer contrarian investment outcomes.

The ‘incoming’ overview

Our discussion began with a brief overview from Rafe Lewis, head of specialist research, who keeps a close watch on the US political landscape. Rafe stated that Republicans not only have the executive branch but now have control of both the Senate and House of Representatives, as well as a conservative-leaning Supreme Court.

Rafe also noted that personnel are important, and despite Trump getting off to a fast start nominating a number of individuals for key administration posts, it is too early to assess the full makeup of his administration and how his policies will be implemented.

The macro take

President-elect Donald Trump has vowed to impose additional tariffs on China, Mexico and Canada, that together account for about 43% of all goods imports to the US. Taken at face value, these tariffs are forecast to increase inflation. However, there were differing views among the team about tariffs and their potential effects.

Ella Hoxha, head of fixed income, suggested that tariffs are likely coming but that their impact on rates and inflation are currently difficult to assess. Immigration curbs and tariffs may slow growth and raise inflation, while deregulation and tax cuts could enhance growth. US interest-rate expectations have adjusted based on growth and the election results. Other regions see declining rates due to weaker growth. The US Federal Reserve is expected to act cautiously in 2025, balancing inflation and growth uncertainties.

Ella also suggested there is a wrinkle in the US dollar outlook. The recent dollar strength may face challenges as the new administration aims to boost US manufacturing competitiveness, which would require a shift in policy on the dollar. If the US dollar is part of the policy toolkit for the incoming administration, we should pay attention to how it approaches policies to weaken the dollar, as they could create volatility in markets. If successful, we could see a reversal in dollar strength in the second quarter of 2025 and later into the year.

As a final thought on the macro outlook, while it appears that Trump may be releasing the ‘animal spirits’ that led to a strong economy during his first term, Brendan Mulhern, global strategist, pointed out that the current setup is very different to that in 2016. The first Trump administration benefited from a very favourable global macro environment. 2017 was the first period of synchronised global growth since the global financial crisis; the US economy benefited from the broad improvement in global growth. Today, the economic cycles in the US and Europe are mature and growth in China remains subdued. From a market-cycle perspective, bearishness pervaded in 2016, and that was evident in positioning. Today it is the opposite—investors are bullish and have substantial exposure to equities. It is likely that it was never about Trump in 2016, and it is unlikely to be all about Trump on this occasion.

Sector rotation?

The Trump scenario suggests there may be a rotation in equity-sector leadership. Globally, the US benefits from the prospect of lower tax rates. The intersection of Trump’s policies may have greater implications for specific sectors. Deregulation and taxation could benefit banks and small/mid-cap stocks, while oil and gas companies may gain from the short-term positive sentiment of the president-elect’s focus on energy independence. If Trump decides to roll back support for renewables and electric vehicles under the Inflation Reduction Act, stocks in those sectors could see a pullback. Among industrials, stocks with more exposure to global supply chains, China’s economy and immigrant workers may suffer the most, while those in the automation business could benefit.

Consumer discretionary

Deputy head of global equity research Maria Toneva discussed the impact of tariffs on the retail sector. She believes that although tariffs could be significant, they are more likely to be moderate. If the US were to impose a 60% tariff on China, major retailers would need to pass these costs on to consumers, potentially causing a new rise in inflation. Toneva thinks Trump and his team are calculating this scenario but predicts the tariffs could likely be similar to the more manageable 2018 levels.

For brands with stronger pricing power, she expects the tariff impact to be more manageable. For luxury goods, a strong dollar could benefit European retailers that pay in euros but sell in dollars, counterbalancing any tariffs. In the US, tax cuts, rising markets and increased focus on cryptocurrency might boost luxury spending.

Health care

President-elect Donald Trump aims to reform the US health-care system, raising concerns for health-care investors. Research analyst Matt Jenkin is monitoring potential regulatory changes that could impact the sector. Jenkin focuses on the US Food and Drug Administration’s balance of safety and efficacy, fearing disruptions from new policies under Trump. Trump’s pick for Health and Human Services, Robert F. Kennedy Jr., emphasises safety, particularly for traditional drugs and vaccines, which may increase regulatory scrutiny. Trump’s cost-cutting efforts, including a proposed international reference pricing system for prescription drugs and using the Inflation Reduction Act to negotiate Medicare drug prices, could significantly affect health-care spending.

Higher interest rates pose challenges for biotechnology funding, yet merger and acquisition activity may surge under Trump, benefiting the industry. Additionally, tariffs and border taxes could affect companies manufacturing in Mexico, Ireland and Costa Rica.

Energy

According to research analyst and portfolio manager Dave Intoppa, the energy cycle and capital allocations targets have far more important implications for the energy sector than the election results. Intoppa argued that the election results should not significantly affect shale drilling in the US, while acknowledging that regulatory changes could marginally influence production. In his view, the potential reduction in oil volumes from sources like Iran is a greater concern. Intoppa remains cautious about market predictions and has not changed positioning, while emphasising his positive outlook on natural gas.

Information technology

Portfolio manager Rob Zeuthen indicated that he is paying close attention to the direction of the US dollar. As Zeuthen explained, most of the technology sector, and particularly semiconductors and hardware, is priced in US dollars. According to Zeuthen, if the US dollar continues to strengthen, that could dampen sector performance, and adding tariffs to the mix could further suppress demand. Despite these concerns, Zeuthen stated, “There are too many positive thematic drivers within tech to be too bearish.” While he is selective in the semiconductors and hardware segments, he is bullish on software and internet stocks.

With the potential for M&A activity to increasingly come into play next year, he thinks that certain small-to-mid-cap software companies may be motivated to sell due to concerns about where their futures might lie given the rise of artificial intelligence ‘smart agents’. “A lot of these companies are sold, not bought,” he noted, proactively seeking buyers and leveraging market competition to maximise the sales price. For this reason, he also believes that software companies may benefit from lower taxes, another positive consideration to appreciate.

Mobility

Frank Goguen, equity portfolio manager, raised the contrarian view that China could establish manufacturing operations on US soil. He explained that Trump, who has pledged to build the US workforce, has commented that he is open to the possibility. Goguen believes that the probability is low but not off the table, particularly as a Chinese battery manufacturer and technology company recently expressed interest in building a battery factory in the US if permitted. The other side to this is whether China’s government would allow any technology transfer to enter the US via the local production.

Charging ahead

While the 2024 election outcome has already driven significant market movements, the future remains uncertain, with multiple variables at play. Our multidimensional research and portfolio management teams carefully weigh these factors, considering both the macro and micro outlook and the associated risks of the changing landscape. As always, maintaining flexibility and staying informed will be key to navigating evolving market conditions and unlocking opportunity.

Tim Quast, founder and managing director of ModernIR, joins Double Take to shed light on the strategies employed by public company C-suites and their investor relations teams to communicate with markets that are increasingly dominated by passive strategies.

Listen on

Tim Quast, founder and managing director of ModernIR, joins Double Take to shed light on the strategies employed by public company C-suites and their investor relations teams to communicate with markets that are increasingly dominated by passive strategies.

Listen on

Donald Trump’s US presidential win, together with a Republican sweep of the US Congress, puts Trump in a strong position to implement his economic agenda. As his campaign proposals were very broad-brush, it is too early to assess how his policies will play out. However, he has made clear that trade tariffs, immigration controls, regulatory easing and tax cuts are priorities.

Despite the uncertainty about which policies Trump may implement, a consensus outlook has developed based on first-term governance, his rhetoric over the past four years and pledges he made during this year’s campaign. Broadly, that consensus suggests reflation, a strong US dollar, higher interest rates, reshoring and oil-supply growth, to name a few, with the potential for material downstream effects on broad asset classes and equity sectors.

Our multidimensional approach allows investment team members to exploit an unusually wide and innovative range of inputs in their idea generation, and it shapes the creation and management of our strategies. In order to assess the consensus view’s validity, we gathered our multidimensional research and portfolio management teams to debate market assumptions and offer contrarian investment outcomes.

The “Incoming” Overview

Our discussion began with a brief overview from Rafe Lewis, head of specialist research, who keeps a close watch on the Beltway. Rafe stated that Republicans not only have the executive branch but now have control of both the Senate and House of Representatives, as well as a conservative-leaning Supreme Court.

Rafe also noted that personnel are important, and despite Trump getting off to a fast start nominating a number of individuals for key administration posts, it is too early to assess the full makeup of his administration and how his policies will be implemented.

The Macro Take

President-elect Donald Trump has vowed to impose additional tariffs on China, Mexico and Canada, that together account for about 43% of all goods imports to the US. Taken at face value, these tariffs are forecast to increase inflation. However, there were differing views among the team about tariffs and their potential effects.

Ella Hoxha, head of fixed income, suggested that tariffs are likely coming but that their impact on rates and inflation are currently difficult to assess. Immigration curbs and tariffs may slow growth and raise inflation, while deregulation and tax cuts could enhance growth. US interest-rate expectations have adjusted based on growth and the election results. Other regions see declining rates due to weaker growth. The US Federal Reserve is expected to act cautiously in 2025, balancing inflation and growth uncertainties.

Ella also suggested there is a wrinkle in the US dollar outlook. The recent dollar strength may face challenges as the new administration aims to boost US manufacturing competitiveness, which would require a shift in policy on the dollar. If the US dollar is part of the policy toolkit for the incoming administration, we should pay attention to how it approaches policies to weaken the dollar, as they could create volatility in markets. If successful, we could see a reversal in dollar strength in the second quarter of 2025 and later into the year.

As a final thought on the macro outlook, while it appears that Trump may be releasing the ‘animal spirits’ that led to a strong economy during his first term, Brendan Mulhern, global strategist, pointed out that the current setup is very different to that in 2016. The first Trump administration benefited from a very favorable global macro environment. 2017 was the first period of synchronized global growth since the global financial crisis; the US economy benefited from the broad improvement in global growth. Today, the economic cycles in the US and Europe are mature and growth in China remains subdued. From a market-cycle perspective, bearishness pervaded in 2016, and that was evident in positioning. Today it is the opposite—investors are bullish and have substantial exposure to equities. It is likely that it was never about Trump in 2016, and it is unlikely to be all about Trump on this occasion.

Sector Rotation?

The Trump scenario suggests there may be a rotation in equity-sector leadership. Globally, the US benefits from the prospect of lower tax rates. The intersection of Trump’s policies may have greater implications for specific sectors. Deregulation and taxation could benefit banks and small/mid-cap stocks, while oil and gas companies may gain from the short-term positive sentiment of the President-elect’s focus on energy independence. If Trump decides to roll back support for renewables and EVs under the Inflation Reduction Act, stocks in those sectors could see a pullback. Among industrials, stocks with more exposure to global supply chains, China’s economy and immigrant workers may suffer the most, while those in the automation business could benefit.

Consumer Discretionary

Deputy head of global equity research Maria Toneva discussed the impact of tariffs on the retail sector. She believes that although tariffs could be significant, they are more likely to be moderate. If the US was to impose a 60% tariff on China, major retailers would need to pass these costs on to consumers, potentially causing a new rise in inflation. Toneva thinks Trump and his team are calculating this scenario but predicts the tariffs could likely be similar to the more manageable 2018 levels.

For brands with stronger pricing power, she expects the tariff impact to be more manageable. For luxury goods, a strong dollar could benefit European retailers that pay in euros but sell in dollars, counterbalancing any tariffs. In the US, tax cuts, rising markets and increased focus on cryptocurrency might boost luxury spending.

Health Care

President-elect Donald Trump aims to reform the US health-care system, raising concerns for health-care investors. Research analyst Matt Jenkin is monitoring potential regulatory changes that could impact the sector. Jenkin focuses on the US Food and Drug Administration’s balance of safety and efficacy, fearing disruptions from new policies under Trump. Trump’s pick for Health and Human Services, Robert F. Kennedy Jr., emphasizes safety, particularly for traditional drugs and vaccines, which may increase regulatory scrutiny. Trump’s cost-cutting efforts, including a proposed international reference pricing system for prescription drugs and using the Inflation Reduction Act to negotiate Medicare drug prices, could significantly affect health-care spending.

Higher interest rates pose challenges for biotechnology funding, yet merger and acquisition activity may surge under Trump, benefiting the industry. Additionally, tariffs and border taxes could affect companies manufacturing in Mexico, Ireland and Costa Rica.

Energy

According to research analyst and portfolio manager Dave Intoppa, the energy cycle and capital allocations targets have far more important implications for the energy sector than the election results. Intoppa argued that the election results should not significantly affect shale drilling in the US, while acknowledging that regulatory changes could marginally influence production. In his view, the potential reduction in oil volumes from sources like Iran is a greater concern. Intoppa remains cautious about market predictions and has not changed positioning, while emphasizing his positive outlook on natural gas.

Technology

Portfolio manager Rob Zeuthen indicated that he is paying close attention to the direction of the US dollar. As Zeuthen explained, most of the technology sector, and particularly semiconductors and hardware, is priced in US dollars. According to Zeuthen, if the US dollar continues to strengthen, that could dampen sector performance, and adding tariffs to the mix could further suppress demand.

Despite these concerns, Zeuthen stated, “There are too many positive thematic drivers within tech to be too bearish.” While he is selective in the semiconductors and hardware segments, he is bullish on software and internet stocks.

With the potential for M&A activity to increasingly come into play next year, he thinks that certain small-to-mid-cap software companies may be motivated to sell due to concerns about where their futures might lie given the rise of artificial intelligence ‘smart agents’. “A lot of these companies are sold, not bought,” he notes, proactively seeking buyers and leveraging market competition to maximize the sales price. For this reason, he also believes that software companies may benefit from lower taxes, another positive consideration to appreciate.

Mobility

Frank Goguen, equity portfolio manager, raised the contrarian view that China could establish manufacturing operations on US soil. He explained that Trump, who has pledged to build the US workforce, has commented that he is open to the possibility. Goguen believes that the probability is low but not off the table, particularly as a Chinese battery manufacturer and technology company recently expressed interest in building a battery factory in the US if permitted. The other side to this is whether China’s government would allow any technology transfer to enter the US via the local production.

Charging Ahead

While the 2024 election outcome has already driven significant market movements, the future remains uncertain, with multiple variables at play. Our multidimensional research and portfolio management teams carefully weigh these factors, considering both the macro and micro outlook and the associated risks of the changing landscape. As always, maintaining flexibility and staying informed will be key to navigating evolving market conditions and unlocking opportunity.

The global outlook

From a global perspective, there are mixed signals for the economic outlook. Recent activity data such as purchasing managers’ indexes (PMIs) indicate contraction in Europe, Asia and some emerging-market countries. The US, however, has been an exception to this, with a more positive outlook, at least for the time being. The key question is whether this growth momentum will extend beyond the US.

Given its more promising short-term outlook, there is a divergence between the US and the rest of the world in terms of interest rates, currency performance and equity markets. This divergence may persist into the first quarter of 2025, but beyond that, uncertainty prevails, and some recoupling may be possible in the second half of the year.

The policy agenda of President-elect Donald Trump’s new US administration could have major implications. Policies focused on curbing immigration and imposing tariffs could hinder growth and increase inflation. Conversely, deregulation and potential tax cuts could boost growth. There is also discussion about improving government efficiency, reducing red tape, and cutting some expenditure programmes to control the budget deficit. The incoming administration will not be in place until 20 January 2025, and some policies may be implemented while others may be scaled back.

Interest-rate expectations in the US have been revised in line with growth and the election outcome. In other regions, interest-rate expectations are declining given weaker growth. The US Federal Reserve (Fed) is expected to be cautious in 2025, balancing inflationary pressures and growth uncertainties.

The US dollar’s strength, driven by recent appreciation, may face challenges as the new administration aims to boost US manufacturing competitiveness, which would require a shift in policy on the dollar. If the US dollar is part of the policy toolkit for the incoming administration, we should pay attention to how it approaches policies to weaken the dollar, as they could create volatility in markets. If successful, we could see a reversal in dollar strength in the second quarter and later into the year.

One aspect that we think is worth monitoring is the term premium (the excess return that investors demand to hold a longer-term bond instead of investing in shorter-term securities), which reflects investors’ fiscal concerns. There has been some build-up in 2024, but it has come with a re-steepening of the US yield curve. At this juncture, we are not unduly concerned, but we remain vigilant.

Inflation and interest rates

We believe the neutral interest rate (the level at which economic activity is neither stimulated nor restrained) in the US is currently somewhere between 3.5% and 4%, which seems to be already priced in by the market. The surprise element is what will matter – whether the economy stays strong beyond the first quarter of 2025. For rates to fall significantly below 4%, we believe growth would need to surprise to the downside.

In terms of inflation, the core components remain sticky, which is why we think the Fed is likely to adopt a cautious policy. If the growth elements of the new administration’s policy agenda do not turn out to be as supportive as expected, the Fed could engage in further rate cuts. We need to be wary in understanding which factors will have more weight – whether it is the tax and deregulation agenda, or immigration and tariffs. Tariffs could come sooner and hit sentiment, being more painful for countries in Asia and Europe. Deregulation and migration would take some time to be reflected in company earnings and inflation. The net risks to inflation are higher, but the macro backdrop remains unclear, so we caution against drawing major conclusions.

For these reasons, we need to monitor the term premium in the bond markets. A lot of what could occur is fiscally expansive and puts upward risks on inflation in the US. Could such developments rile bond markets so that this fiscal term premium emerges? The US is a prime candidate for bond vigilantes.

The US is a prime candidate for bond vigilantes.

Weakening of the US dollar?

As dynamic investors with a long-term view of markets, we think the most interesting aspect is the policy which aims to reindustrialise the US. The ‘America First’ policy has major implications for the currency setup. While some incoming administration officials have suggested efforts to weaken the US dollar – and whether the administration actively pursues such measures remains to be seen – this does not guarantee that the currency will weaken significantly. The market’s response so far has suggested stickier rates, more persistent inflation and higher growth in the US, which is likely to lead to a rising dollar. This theme could continue, but we must be cautious as a stronger US dollar could undercut Trump’s stated policies to boost US manufacturing competitiveness.

The dollar’s trajectory is likely to be influenced by negotiations between the US and China, Europe, and other emerging-market economies which are trading partners. We believe there is a multi-year risk of the dollar’s strength reversing, leading to a weaker dollar over the long term.

Geopolitics at play

China is seen not only as a trading partner for the US, but also as a rival in the technology sector, as well as economically. This divergence in relationships may persist. Since 2018, when the last set of tariffs was imposed, China has been increasing its efforts to move away from its current account surplus with the US. We have seen this in the country’s transition from low-cost manufacturing to higher-end manufacturing of goods such as electric vehicles. We expect this trend to continue.

Europe, traditionally seen as a partner to the US, is in a tough spot owing to its economic exposure to China. The euro has weakened, and Europe faces a choice between US tariffs and its own tariffs on Chinese electric vehicles. Europe might need to offer something in return for defence protection, possibly increasing investment in the US or accepting appreciation of the euro. There might be scope for the US to negotiate with Europe, but China is a different story.

Opportunities for 2025

From a contrarian perspective, we think the US dollar’s future could be interesting. We believe an intriguing possibility is that foreign assets could outperform US assets in 2025. The euro and European assets look particularly interesting to us, as do emerging-market currencies and local rates.

In the short term, there is likely to be more pressure on the currencies, bond markets and equity markets of emerging-market economies. However, we believe there is a once-in-a-decade opportunity to buy attractively priced assets in many emerging economies, although this is predicated on the strength of the US dollar over the short term. If dollar strength does materialise, we think the most appealing assets could be in emerging markets as well as in Europe, where the market is currently pricing in a lot of pessimism. In this scenario, there could be capital outflows from the US. 

We believe there is a once-in-a-decade opportunity to buy attractively priced assets in many emerging economies, although this is predicated on the strength of the US dollar over the short term.

There is also the possibility that Europe could react under pressure. There has been more discussion around the Draghi report, which is a very detailed plan on how to deal with competitiveness and most of the major stumbling blocks that Europe faces. Should the Draghi plan receive more attention, we could see a multi-year period of investment in which Europe invests as much as 5% of GDP to repair its framework, which is still incomplete. This would be very bullish for European assets, but it is not a given.

The Global Outlook

From a global perspective, there are mixed signals for the economic outlook. Recent activity data such as purchasing managers’ indexes (PMIs) indicate contraction in Europe, Asia and some emerging-market countries. The US, however, has been an exception to this, with a more positive outlook, at least for the time being. The key question is whether this growth momentum will extend beyond the US.

Given its more promising short-term outlook, there is a divergence between the US and the rest of the world in terms of interest rates, currency performance and equity markets. This divergence may persist into the first quarter of 2025, but beyond that, uncertainty prevails, and some recoupling may be possible in the second half of the year.

The policy agenda of President-elect Donald Trump’s new US administration could have major implications. Policies focused on curbing immigration and imposing tariffs could hinder growth and increase inflation. Conversely, deregulation and potential tax cuts could boost growth. There is also discussion about improving government efficiency, reducing red tape, and cutting some expenditure programs to control the budget deficit. The incoming administration will not be in place until January 20, 2025, and some policies may be implemented while others may be scaled back.

Interest-rate expectations in the US have been revised in line with growth and the election outcome. In other regions, interest-rate expectations are declining given weaker growth. The US Federal Reserve (Fed) is expected to be cautious in 2025, balancing inflationary pressures and growth uncertainties.

The US dollar’s strength, driven by recent appreciation, may face challenges as the new administration aims to boost US manufacturing competitiveness, which would require a shift in policy on the dollar. If the US dollar is part of the policy toolkit for the incoming administration, we should pay attention to how it approaches policies to weaken the dollar, as they could create volatility in markets. If successful, we could see a reversal in dollar strength in the second quarter and later into the year.

One aspect that we think is worth monitoring is the term premium (the excess return that investors demand to hold a longer-term bond instead of investing in shorter-term securities), which reflects investors’ fiscal concerns. There has been some build-up in 2024, but it has come with a re-steepening of the US yield curve. At this juncture, we are not unduly concerned, but we remain vigilant.

Inflation and Interest Rates

We believe the neutral interest rate (the level at which economic activity is neither stimulated nor restrained) in the US is currently somewhere between 3.5% and 4%, which seems to be already priced in by the market. The surprise element is what will matter – whether the economy stays strong beyond the first quarter of 2025. For rates to fall significantly below 4%, we believe growth would need to surprise to the downside.

In terms of inflation, the core components remain sticky, which is why we think the Fed is likely to adopt a cautious policy. If the growth elements of the new administration’s policy agenda do not turn out to be as supportive as expected, the Fed could engage in further rate cuts. We need to be wary in understanding which factors will have more weight – whether it is the tax and deregulation agenda, or immigration and tariffs. Tariffs could come sooner and hit sentiment, being more painful for countries in Asia and Europe. Deregulation and migration would take some time to be reflected in company earnings and inflation. The net risks to inflation are higher, but the macro backdrop remains unclear, so we caution against drawing major conclusions.

For these reasons, we need to monitor the term premium in the bond markets. A lot of what could occur is fiscally expansive and puts upward risks on inflation in the US. Could such developments rile bond markets so that this fiscal term premium emerges? The US is a prime candidate for bond vigilantes.

The US is a prime candidate for bond vigilantes.

Weakening of the US Dollar?

As dynamic investors with a long-term view of markets, we think the most interesting aspect is the policy which aims to reindustrialize the US. The ‘America First’ policy has major implications for the currency setup. While some incoming administration officials have suggested efforts to weaken the US dollar – and whether the administration actively pursues such measures remains to be seen – this does not guarantee that the currency will weaken significantly. The market’s response so far has suggested stickier rates, more persistent inflation and higher growth in the US, which is likely to lead to a rising dollar. This theme could continue, but we must be cautious as a stronger US dollar could undercut Trump’s stated policies to boost US manufacturing competitiveness.

The dollar’s trajectory is likely to be influenced by negotiations between the US and China, Europe, and other emerging-market economies which are trading partners. We believe there is a multi-year risk of the dollar’s strength reversing, leading to a weaker dollar over the long term.

Geopolitics at Play

China is seen not only as a trading partner for the US, but also as a rival in the technology sector, as well as economically. This divergence in relationships may persist. Since 2018, when the last set of tariffs was imposed, China has been increasing its efforts to move away from its current account surplus with the US. We have seen this in the country’s transition from low-cost manufacturing to higher-end manufacturing of goods such as electric vehicles. We expect this trend to continue.

Europe, traditionally seen as a partner to the US, is in a tough spot owing to its economic exposure to China. The euro has weakened, and Europe faces a choice between US tariffs and its own tariffs on Chinese electric vehicles. Europe might need to offer something in return for defense protection, possibly increasing investment in the US or accepting appreciation of the euro. There might be scope for the US to negotiate with Europe, but China is a different story.

Opportunities for 2025

From a contrarian perspective, we think the US dollar’s future could be interesting. We believe an intriguing possibility is that foreign assets could outperform US assets in 2025. The euro and European assets look particularly interesting to us, as do emerging-market currencies and local rates.

In the short term, there is likely to be more pressure on the currencies, bond markets and equity markets of emerging-market economies. However, we believe there is a once-in-a-decade opportunity to buy attractively priced assets in many emerging economies, although this is predicated on the strength of the US dollar over the short term. If dollar strength does materialize, we think the most appealing assets could be in emerging markets as well as in Europe, where the market is currently pricing in a lot of pessimism. In this scenario, there could be capital outflows from the US. 

We believe there is a once-in-a-decade opportunity to buy attractively priced assets in many emerging economies, although this is predicated on the strength of the US dollar over the short term.

There is also the possibility that Europe could react under pressure. There has been more discussion around the Draghi report, which is a very detailed plan on how to deal with competitiveness and most of the major stumbling blocks that Europe faces. Should the Draghi plan receive more attention, we could see a multi-year period of investment in which Europe invests as much as 5% of GDP to repair its framework, which is still incomplete. This would be very bullish for European assets, but it is not a given.

The global outlook

From a global perspective, there are mixed signals for the economic outlook. Recent activity data such as purchasing managers’ indexes (PMIs) indicate contraction in Europe, Asia and some emerging-market countries. The US, however, has been an exception to this, with a more positive outlook, at least for the time being. The key question is whether this growth momentum will extend beyond the US.

Given its more promising short-term outlook, there is a divergence between the US and the rest of the world in terms of interest rates, currency performance and equity markets. This divergence may persist into the first quarter of 2025, but beyond that, uncertainty prevails, and some recoupling may be possible in the second half of the year.

The policy agenda of President-elect Donald Trump’s new US administration could have major implications. Policies focused on curbing immigration and imposing tariffs could hinder growth and increase inflation. Conversely, deregulation and potential tax cuts could boost growth. There is also discussion about improving government efficiency, reducing red tape, and cutting some expenditure programmes to control the budget deficit. The incoming administration will not be in place until 20 January 2025, and some policies may be implemented while others may be scaled back.

Interest-rate expectations in the US have been revised in line with growth and the election outcome. In other regions, interest-rate expectations are declining given weaker growth. The US Federal Reserve (Fed) is expected to be cautious in 2025, balancing inflationary pressures and growth uncertainties.

The US dollar’s strength, driven by recent appreciation, may face challenges as the new administration aims to boost US manufacturing competitiveness, which would require a shift in policy on the dollar. If the US dollar is part of the policy toolkit for the incoming administration, we should pay attention to how it approaches policies to weaken the dollar, as they could create volatility in markets. If successful, we could see a reversal in dollar strength in the second quarter and later into the year.

One aspect that we think is worth monitoring is the term premium (the excess return that investors demand to hold a longer-term bond instead of investing in shorter-term securities), which reflects investors’ fiscal concerns. There has been some build-up in 2024, but it has come with a re-steepening of the US yield curve. At this juncture, we are not unduly concerned, but we remain vigilant.

Inflation and interest rates

We believe the neutral interest rate (the level at which economic activity is neither stimulated nor restrained) in the US is currently somewhere between 3.5% and 4%, which seems to be already priced in by the market. The surprise element is what will matter – whether the economy stays strong beyond the first quarter of 2025. For rates to fall significantly below 4%, we believe growth would need to surprise to the downside.

In terms of inflation, the core components remain sticky, which is why we think the Fed is likely to adopt a cautious policy. If the growth elements of the new administration’s policy agenda do not turn out to be as supportive as expected, the Fed could engage in further rate cuts. We need to be wary in understanding which factors will have more weight – whether it is the tax and deregulation agenda, or immigration and tariffs. Tariffs could come sooner and hit sentiment, being more painful for countries in Asia and Europe. Deregulation and migration would take some time to be reflected in company earnings and inflation. The net risks to inflation are higher, but the macro backdrop remains unclear, so we caution against drawing major conclusions.

For these reasons, we need to monitor the term premium in the bond markets. A lot of what could occur is fiscally expansive and puts upward risks on inflation in the US. Could such developments rile bond markets so that this fiscal term premium emerges? The US is a prime candidate for bond vigilantes.

The US is a prime candidate for bond vigilantes.

Weakening of the US dollar?

As dynamic investors with a long-term view of markets, we think the most interesting aspect is the policy which aims to reindustrialise the US. The ‘America First’ policy has major implications for the currency setup. While some incoming administration officials have suggested efforts to weaken the US dollar – and whether the administration actively pursues such measures remains to be seen – this does not guarantee that the currency will weaken significantly. The market’s response so far has suggested stickier rates, more persistent inflation and higher growth in the US, which is likely to lead to a rising dollar. This theme could continue, but we must be cautious as a stronger US dollar could undercut Trump’s stated policies to boost US manufacturing competitiveness.

The dollar’s trajectory is likely to be influenced by negotiations between the US and China, Europe, and other emerging-market economies which are trading partners. We believe there is a multi-year risk of the dollar’s strength reversing, leading to a weaker dollar over the long term.

Geopolitics at play

China is seen not only as a trading partner for the US, but also as a rival in the technology sector, as well as economically. This divergence in relationships may persist. Since 2018, when the last set of tariffs was imposed, China has been increasing its efforts to move away from its current account surplus with the US. We have seen this in the country’s transition from low-cost manufacturing to higher-end manufacturing of goods such as electric vehicles. We expect this trend to continue.

Europe, traditionally seen as a partner to the US, is in a tough spot owing to its economic exposure to China. The euro has weakened, and Europe faces a choice between US tariffs and its own tariffs on Chinese electric vehicles. Europe might need to offer something in return for defence protection, possibly increasing investment in the US or accepting appreciation of the euro. There might be scope for the US to negotiate with Europe, but China is a different story.

Opportunities for 2025

From a contrarian perspective, we think the US dollar’s future could be interesting. We believe an intriguing possibility is that foreign assets could outperform US assets in 2025. The euro and European assets look particularly interesting to us, as do emerging-market currencies and local rates.

In the short term, there is likely to be more pressure on the currencies, bond markets and equity markets of emerging-market economies. However, we believe there is a once-in-a-decade opportunity to buy attractively priced assets in many emerging economies, although this is predicated on the strength of the US dollar over the short term. If dollar strength does materialise, we think the most appealing assets could be in emerging markets as well as in Europe, where the market is currently pricing in a lot of pessimism. In this scenario, there could be capital outflows from the US. 

We believe there is a once-in-a-decade opportunity to buy attractively priced assets in many emerging economies, although this is predicated on the strength of the US dollar over the short term.

There is also the possibility that Europe could react under pressure. There has been more discussion around the Draghi report, which is a very detailed plan on how to deal with competitiveness and most of the major stumbling blocks that Europe faces. Should the Draghi plan receive more attention, we could see a multi-year period of investment in which Europe invests as much as 5% of GDP to repair its framework, which is still incomplete. This would be very bullish for European assets, but it is not a given.