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.

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.

Will the global economy experience a hard or soft landing, or a rebound?

We need to be careful when talking about the global economy as different regions have been operating at different speeds. For example, China has been particularly sluggish, with the consumer exhibiting pronounced weakness, although the export side of the economy has been more resilient. Europe has suffered from the contagion effect from China, as manufacturing had been reliant on Chinese demand, while consumers are still experiencing the aftermath of the inflationary wave.

The US has demonstrated continued exceptionalism and has topped the league table of the major economic blocks in terms of resilience. While the consensus is for a soft landing, the resurgence of inflation is a growing risk as the new political regime is likely to deploy fiscal stimulus as a key tool and the agenda is decidedly pro-growth.

In our view, the bigger risk for the US is in fact ‘no landing’, with the possibility of inflation overshooting. Interest rates are likely to stay higher for longer, and markets have already priced out a number of rate cuts that had previously been pencilled in for 2025. This could impede a recovery in the US housing market. On balance, however, we still think that the US economy is likely to remain buoyant and would attribute a low probability to a recession at this juncture.

What is the impact of the US election? Is US equity market leadership set to continue?

For the time being, the US is the only show in town, while China and Europe are decidedly out of favour and mired with challenges.

In terms of equity market leadership, technology has been relatively unchallenged at the top of the league table, but this could change if artificial intelligence (AI) hopes disappoint, or should the sector come under pressure from rising bond yields. We could see a broad range of sectors among the future winners, with areas such as domestic cyclicals, financials and small caps playing catch-up. US-dollar strength could also be a drag on technology stocks, as well as negatively affecting the performance of areas such as health care, which tends to be dominated by those companies deriving their earnings from overseas.

Is China investable again? Will stimulus revive the economy?

The Chinese economy has struggled for the last few years on the back of government intervention, which was perceived by markets as unhelpful, as well as distress in the real-estate sector as a result of excessive investment. The Chinese government had not been active on the stimulus front throughout 2023 and in the first half of 2024, but with the announcement of stimulus plans in September, it does seem to have pulled some levers to kick-start the economy.

Although there are tentative signs that the consumer is stabilising, the stimulus currently appears insufficient to engineer a full-blown recovery. We may see some drip-feeding of further stimulus which could be positive at the margin, but the significant structural issues in the real-estate market are unlikely to be resolved overnight.

China enjoys the biggest trade surplus it has ever had, giving rise to pockets of optimism. A potential recovery is, however, difficult to play from an investment perspective, and we have sought to gain exposure to the more positive sentiment on a tactical basis.

AI-related spending: will the investment pay off?

AI has remained a key focus for investors in 2024 and there has been huge excitement around its potential to increase productivity following decades of scant progress on this front. Companies can be more intelligent in the way they manage their businesses in areas such as supply-chain management and identification of consumer trends.

We are now getting to the ‘show me’ phase: considerable investment has been deployed and there is a desire to monetise it. There is a genuine risk that the market has got ahead of itself in terms of expectations, as reflected in lofty price earnings multiples, and there is the potential for a hangover if disappointment ensues. The gold-rush mentality of upping the investment ante has set some companies up for a fall if an increase in demand does not justify the scale of the investment made.

We remain alert to the broadening out of the AI trend and there are a range of companies in peripheral areas that could partially benefit from related productivity gains.

We continue to have significant investment in this theme in the strategy. Exposure is skewed towards the ‘picks and shovels’ through semiconductor names. While we believe in the long-term trend, we are mindful that we could see some pullbacks along the way. We also remain alert to the broadening out of the AI trend and there are a range of companies in peripheral areas that could partially benefit from related productivity gains.

Do you see fixed income returning to its role as a diversifier?

Bonds will have a role, but they are unlikely to be as dominant as they have been in the past.

Bonds have typically acted as a ‘flight-to-safety’ asset, as well as cushioning against growth shocks. They have also had the benefit of positive carry (when the benefit of holding the asset exceeds the costs). As a result of the more inflationary environment inherent in this new market regime where fiscal policy plays a more dominant role, bonds may no longer be as consistent a hedging tool and there will be a need to further diversify. The new regime appears more fragile, and the shocks of tomorrow are likely to look very different in terms of frequency, intensity, origin and their ability to spread across the system.

A portfolio’s ‘stabilising’ assets will need to be different from those used previously and could include alternative risk premia and other alternative return streams. In our view, the fact that bond insurance appeared to be ‘free’ was an anomaly, and a product of the distorted policy regime that allowed yield curves to steepen.

What is the outlook for commodities – gold/silver/oil/copper?

Gold seems to have got ahead of itself, sensing that expansionary fiscal policy was on the cards with a likely Trump victory in the US presidential election. We still like gold and consider it to be a useful diversifier, but we have reduced exposure for the time being.

We are selective about the weighting to commodities, mindful that a strong US dollar in the short-term will not be a positive for the commodity complex. Copper is an area that we still favour, as it is a beneficiary of the green transition, playing into the electric-vehicle theme, as well as being used for data centres, a key element of the AI build-out.

Elsewhere, silver is a precious metal that we like, owing to the attraction of both its industrial use and the fact that it is playing catch-up with gold from a valuation perspective. It is, however, a higher-beta commodity and does not have the same safe-haven attributes as gold. We have reduced the strategy’s oil exposure on the equity front in the expectation that the new US administration will encourage a higher level of drilling activity or may even lean on OPEC to increase supply.

Your capital may be at risk. The value of investments and the income from them can fall as well as rise and investors may not get back the original amount invested.

Will the global economy experience a hard or soft landing, or a rebound?

We need to be careful when talking about the global economy as different regions have been operating at different speeds. For example, China has been particularly sluggish, with the consumer exhibiting pronounced weakness, although the export side of the economy has been more resilient. Europe has suffered from the contagion effect from China, as manufacturing had been reliant on Chinese demand, while consumers are still experiencing the aftermath of the inflationary wave.

The US has demonstrated continued exceptionalism and has topped the league table of the major economic blocks in terms of resilience. While the consensus is for a soft landing, the resurgence of inflation is a growing risk as the new political regime is likely to deploy fiscal stimulus as a key tool and the agenda is decidedly pro-growth.

In our view, the bigger risk for the US is in fact ‘no landing,’ with the possibility of inflation overshooting. Interest rates are likely to stay higher for longer, and markets have already priced out a number of rate cuts that had previously been penciled in for 2025. This could impede a recovery in the US housing market. On balance, however, we still think that the US economy is likely to remain buoyant and would attribute a low probability to a recession at this juncture.

What is the impact of the US election? Is US equity market leadership set to continue?

For the time being, the US is the only show in town, while China and Europe are decidedly out of favor and mired with challenges.

In terms of equity market leadership, technology has been relatively unchallenged at the top of the league table, but this could change if artificial intelligence (AI) hopes disappoint, or should the sector come under pressure from rising bond yields. We could see a broad range of sectors among the future winners, with areas such as domestic cyclicals, financials and small caps playing catch-up. US-dollar strength could also be a drag on technology stocks, as well as negatively affect the performance of areas such as health care, which tends to be dominated by those companies deriving their earnings from overseas.

Is China investable again? Will stimulus revive the economy?

The Chinese economy has struggled for the last few years owing to government intervention, which was perceived by markets as unhelpful, as well as distress in the real-estate sector as a result of excessive investment. The Chinese government had not been active on the stimulus front throughout 2023 and in the first half of 2024, but with the announcement of stimulus plans in September, it does seem to have pulled some levers to kick-start the economy.

Although there are tentative signs that the consumer is stabilizing, the stimulus currently appears insufficient to engineer a full-blown recovery. We may see some drip-feeding of further stimulus which could be positive at the margin, but the significant structural issues in the real-estate market are unlikely to be resolved overnight.

China enjoys the biggest trade surplus it has ever had, giving rise to pockets of optimism. A potential recovery is, however, difficult to play from an investment perspective, and we have sought to gain exposure to the more positive sentiment on a tactical basis.

AI-related spending: will the investment pay off?

AI has remained a key focus for investors in 2024 and there has been huge excitement around its potential to increase productivity following decades of scant progress on this front. Companies can be more intelligent in the way they manage their businesses in areas such as supply-chain management and identification of consumer trends.

We are now getting to the ‘show me’ phase: considerable investment has been deployed and there is a desire to monetize it. There is a genuine risk that the market has got ahead of itself in terms of expectations, as reflected in lofty price earnings multiples, and there is the potential for a hangover if disappointment ensues. The gold-rush mentality of upping the investment ante has set some companies up for a fall if an increase in demand does not justify the scale of the investment made.

We remain alert to the broadening out of the AI trend, and there are a range of companies in peripheral areas that could partially benefit from related productivity gains.

We continue to have significant investment in this theme in the strategy. Exposure is skewed toward the ‘picks and shovels’ through semiconductor names. While we believe in the long-term trend, we are mindful that we could see some pullbacks along the way. We also remain alert to the broadening out of the AI trend, and there are a range of companies in peripheral areas that could partially benefit from related productivity gains.

Do you see fixed income returning to its role as a diversifier?

Bonds will have a role, but they are unlikely to be as dominant as they have been in the past.

Bonds have typically acted as a ‘flight-to-safety’ asset, as well as cushioning against growth shocks. They have also had the benefit of positive carry (when the benefit of holding the asset exceeds the costs). As a result of the more inflationary environment inherent in this new market regime where fiscal policy plays a more dominant role, bonds may no longer be as consistent a hedging tool, and there will be a need to further diversify. The new regime appears more fragile, and the shocks of tomorrow are likely to look very different in terms of frequency, intensity, origin and their ability to spread across the system.

A portfolio’s ‘stabilizing’ assets will need to be different from those used previously and could include alternative risk premia and other alternative return streams. In our view, the fact that bond insurance appeared to be ‘free’ was an anomaly and a product of the distorted policy regime that allowed yield curves to steepen.

What is the outlook for commodities – gold/silver/oil/copper?

Gold seems to have got ahead of itself, sensing that expansionary fiscal policy was on the cards with a likely Trump victory in the US presidential election. We still like gold and consider it to be a useful diversifier, but we have reduced exposure for the time being.

We are selective about the weighting to commodities, mindful that a strong US dollar in the short-term will not be a positive for the commodity complex. Copper is an area that we still favor, as it is a beneficiary of the green transition, playing into the electric-vehicle theme, as well as being used for data centers, a key element of the AI build-out.

Elsewhere, silver is a precious metal that we like, owing to the attraction of both its industrial use and the fact that it is playing catch-up with gold from a valuation perspective. It is, however, a higher-beta commodity and does not have the same safe-haven attributes as gold. We have reduced the strategy’s oil exposure on the equity front in the expectation that the new US administration will encourage a higher level of drilling activity or may even lean on the Organization of the Petroleum Exporting Countries (OPEC) to increase supply.

Will the global economy experience a hard or soft landing, or a rebound?

We need to be careful when talking about the global economy as different regions have been operating at different speeds. For example, China has been particularly sluggish, with the consumer exhibiting pronounced weakness, although the export side of the economy has been more resilient. Europe has suffered from the contagion effect from China, as manufacturing had been reliant on Chinese demand, while consumers are still experiencing the aftermath of the inflationary wave.

The US has demonstrated continued exceptionalism and has topped the league table of the major economic blocks in terms of resilience. While the consensus is for a soft landing, the resurgence of inflation is a growing risk as the new political regime is likely to deploy fiscal stimulus as a key tool and the agenda is decidedly pro-growth.

In our view, the bigger risk for the US is in fact ‘no landing’, with the possibility of inflation overshooting. Interest rates are likely to stay higher for longer, and markets have already priced out a number of rate cuts that had previously been pencilled in for 2025. This could impede a recovery in the US housing market. On balance, however, we still think that the US economy is likely to remain buoyant and would attribute a low probability to a recession at this juncture.

What is the impact of the US election? Is US equity market leadership set to continue?

For the time being, the US is the only show in town, while China and Europe are decidedly out of favour and mired with challenges.

In terms of equity market leadership, technology has been relatively unchallenged at the top of the league table, but this could change if artificial intelligence (AI) hopes disappoint, or should the sector come under pressure from rising bond yields. We could see a broad range of sectors among the future winners, with areas such as domestic cyclicals, financials and small caps playing catch-up. US-dollar strength could also be a drag on technology stocks, as well as negatively affecting the performance of areas such as health care, which tends to be dominated by those companies deriving their earnings from overseas.

Is China investable again? Will stimulus revive the economy?

The Chinese economy has struggled for the last few years on the back of government intervention, which was perceived by markets as unhelpful, as well as distress in the real-estate sector as a result of excessive investment. The Chinese government had not been active on the stimulus front throughout 2023 and in the first half of 2024, but with the announcement of stimulus plans in September, it does seem to have pulled some levers to kick-start the economy.

Although there are tentative signs that the consumer is stabilising, the stimulus currently appears insufficient to engineer a full-blown recovery. We may see some drip-feeding of further stimulus which could be positive at the margin, but the significant structural issues in the real-estate market are unlikely to be resolved overnight.

China enjoys the biggest trade surplus it has ever had, giving rise to pockets of optimism. A potential recovery is, however, difficult to play from an investment perspective, and we have sought to gain exposure to the more positive sentiment on a tactical basis.

AI-related spending: will the investment pay off?

AI has remained a key focus for investors in 2024 and there has been huge excitement around its potential to increase productivity following decades of scant progress on this front. Companies can be more intelligent in the way they manage their businesses in areas such as supply-chain management and identification of consumer trends.

We are now getting to the ‘show me’ phase: considerable investment has been deployed and there is a desire to monetise it. There is a genuine risk that the market has got ahead of itself in terms of expectations, as reflected in lofty price earnings multiples, and there is the potential for a hangover if disappointment ensues. The gold-rush mentality of upping the investment ante has set some companies up for a fall if an increase in demand does not justify the scale of the investment made.

We remain alert to the broadening out of the AI trend and there are a range of companies in peripheral areas that could partially benefit from related productivity gains.

We continue to have significant investment in this theme in the strategy. Exposure is skewed towards the ‘picks and shovels’ through semiconductor names. While we believe in the long-term trend, we are mindful that we could see some pullbacks along the way. We also remain alert to the broadening out of the AI trend and there are a range of companies in peripheral areas that could partially benefit from related productivity gains.

Do you see fixed income returning to its role as a diversifier?

Bonds will have a role, but they are unlikely to be as dominant as they have been in the past.

Bonds have typically acted as a ‘flight-to-safety’ asset, as well as cushioning against growth shocks. They have also had the benefit of positive carry (when the benefit of holding the asset exceeds the costs). As a result of the more inflationary environment inherent in this new market regime where fiscal policy plays a more dominant role, bonds may no longer be as consistent a hedging tool and there will be a need to further diversify. The new regime appears more fragile, and the shocks of tomorrow are likely to look very different in terms of frequency, intensity, origin and their ability to spread across the system.

A portfolio’s ‘stabilising’ assets will need to be different from those used previously and could include alternative risk premia and other alternative return streams. In our view, the fact that bond insurance appeared to be ‘free’ was an anomaly, and a product of the distorted policy regime that allowed yield curves to steepen.

What is the outlook for commodities – gold/silver/oil/copper?

Gold seems to have got ahead of itself, sensing that expansionary fiscal policy was on the cards with a likely Trump victory in the US presidential election. We still like gold and consider it to be a useful diversifier, but we have reduced exposure for the time being.

We are selective about the weighting to commodities, mindful that a strong US dollar in the short-term will not be a positive for the commodity complex. Copper is an area that we still favour, as it is a beneficiary of the green transition, playing into the electric-vehicle theme, as well as being used for data centres, a key element of the AI build-out.

Elsewhere, silver is a precious metal that we like, owing to the attraction of both its industrial use and the fact that it is playing catch-up with gold from a valuation perspective. It is, however, a higher-beta commodity and does not have the same safe-haven attributes as gold. We have reduced the strategy’s oil exposure on the equity front in the expectation that the new US administration will encourage a higher level of drilling activity or may even lean on OPEC to increase supply.

With UK politics now firmly settled upon a new course, we note that over half the entire global population will have a similar opportunity in choosing its future political leaders this year. Electorates in many countries are growing tired of established party policies, opening the door for populists to gain a share of power with promises of easy fixes for complex problems.

Just as election results may well change many lives this year, they could also prove consequential for investors in areas such as fiscal and monetary policy, inflation, international trade and broader geopolitical relations.   

Interpreting the macroeconomics is key

As a mixed-assets portfolio manager, it is critical to identify and try to understand how these factors may affect different asset classes. In the short term, the impact of most elections is highly unpredictable, as manifesto promises can often evaporate after polling day. As a result, we focus on the fundamental and longer-term drivers which can often be far more significant. These drivers can clearly be shaken by political shocks, so we believe it makes sense for investors to harness the flexibility and adaptability of mixed-asset strategies that can identify opportunities in the face of such uncertainty.

US dominance

Around 60% of global equity markets, by value, are listed in the US. The US economy also makes up around 25% of global GDP, so it is understandable that its elections have the potential for outsized influence on investment portfolios. In many important aspects, however, such as fiscal positions or geopolitical considerations, the outcome of the US presidential election in November this year is unlikely to result in many significant changes, even though the candidates differ in their approach to areas such as immigration, Russia’s invasion of Ukraine, or energy policy. More importantly, the scale and dominance of US equity markets over recent years is the result of generous returns sustained by an era of loose monetary policy and a reassurance that authorities would be likely to intervene to smooth out the worst impact of a sharp downturn in economic activity.

US debt burden

After several years of support, the US now has an unenviable debt burden of more than 121% of GDP. Pandemic aside, this is almost double the level of the previous cyclical peak in the mid-1990s (around 65%). The outlook is also uncertain, with an ageing population likely to place a compounding burden on key welfare costs. We expect these costs to far exceed economic growth and tax revenues. One key US medical provider said recently that it expects health care to account for an additional 2% of US GDP annually by 2044. 

Many might argue that this does not matter too much because the US dollar remains the dominant global currency of trade and wealth. To date, those who want to trade with the largest consumer economy globally have had little choice but to accept payment in US dollars. They would then also have little alternative but to invest their dollar profits in US assets (US government bonds and stocks).

US dollar hegemony under threat?

This is a circularity that has supported the US currency, market valuations and ever-increasing public debt for decades. However, the dollar’s hegemony appears to be under threat as other global powers take an increasingly political stance, often at odds with the US’s own foreign policy. The huge scale and increase in wealth of China and India’s middle classes suggest there are now alternative consumer markets for manufacturers to pursue. The emerging economies of two decades ago are now economic powerhouses in their own right and increasingly asserting their stature as new global trading patterns emerge. 

While the US remains the pre-eminent global economy and leads the world in technological development, threats to its global dominance are emerging thanks to the trifecta of political change, indebtedness and competitionbetween global powers, as identified by our big government, financialisation and great power competition investment themes.

What does this mean for mixed-asset portfolios?

It is tempting to view higher bond yields (combined with easing inflation) as offering an attractive invitation to invest more in the asset class. However, higher yields can also reflect renewed recognition of the future risk that investors face as the scale of the debt burden comes home to roost. For us, this is a longer-term issue. In the meantime, we believe the higher yield on offer from bonds means there may be opportunities to use them as a tactical risk hedge in volatile markets.

In equities, meanwhile, the US market has become narrowly led by a handful of mega-cap stocks, with ten firms comprising 30% of the S&P 500 index. This is largely thanks to enthusiasm for artificial intelligence, which has the potential to be truly transformative both to existing processes and new innovative possibilities. However, as always, it is important to retain perspective when constructing a mixed-asset investment portfolio, and to try to maintain exposure to transformational trends. We believe this must be considered as part of a further diversification of assets and we remain cognisant that such material tailwinds can fade over time.

All this points to why we believe it makes sense for investors to consider a global mandate, which enables asset managers to pursue opportunities without being tied to asset class or index constraints. Newton’s multidimensional research team identifies and monitors the thematic drivers that shape markets and the outlook for individual firms to identify compelling opportunities, irrespective of location.    

Your capital may be at risk. The value of investments and the income from them can fall as well as rise and investors may not get back the original amount invested.

The market environment following 2008’s global financial crisis was characterised by an abundance of liquidity, effectively zero cash rates and negative correlation between stocks and bonds. With investors sensing that the central-bank ‘put’ was firmly in place to underpin markets, risky assets moved inexorably higher. Waves of central-bank quantitative easing (QE) created an inherent fragility in financial markets, with the abundant liquidity driving asset prices higher and rendering relative-value strategies less effective.

In 2020, the Covid-19 pandemic created such turbulence that inflation surged. Cash rates rose to more than 5%, eroding risk premiums and setting a high hurdle for risky assets. Traditional hedges such as government bonds did not provide diversification.

New regime, new challenges

This drastic change created new challenges for client portfolios. Not only did diversification diminish as correlations between asset classes became less negative or outright positive, but inflation became a risk, particularly given its uncertain trajectory. Moreover, the shift into private-market strategies during the QE era created an unintentional bias towards illiquid assets. Furthermore, high cash rates mean the net present value of long-term cash flows is now lower than during the period of QE.

Is your portfolio prepared for this new regime? Questions and uncertainty abound.

• Will the same portfolio succeed in this very different market environment?
• How should we navigate this new, less synchronous market regime?
• How should portfolios adjust to compete with a high cash rate and lower risk premiums?
• Has your portfolio compensated for the fact that bonds are now less diversifying?

One attractive solution is to use market-neutral, relative-value strategies, whose long/short structure is immune to funding costs and can offer a return stream that is uncorrelated with directional, beta strategies. These strategies are also ideally placed to exploit the richer opportunity set from the post-Covid regime of greater dispersion and heightened volatility, and are less reliant on the direction of asset-class prices owing to their flexible, long/short nature. Furthermore, a set of measures informing long/short decisions – including carry, value, and macro fundamentals – can quickly adapt to changing conditions and provide diversification.

Alpha diversification opportunities

Greater dispersion across asset classes can provide attractive alpha opportunities for both long and short positions. In our view, alpha diversification is more reliable across various macro regimes than beta diversification, making relative-value decisions more resilient to macro shocks. Of course, they are not immune to idiosyncratic shocks within an asset class, but it is our expectation that any such shocks are likely to be contained and not affect relative-value opportunities in other asset classes.

Another advantage of relative-value strategies is that they can be implemented in a cash-efficient manner through highly liquid derivatives that are listed and traded on exchanges. Long and short exposures can also be achieved in synthetic form through a total-return swap. These relative-value strategies also allow investors to ‘port’ the alpha streams on top of the cash used to collateralise the derivative exposures, thereby benefiting from higher cash rates.

Recipe for a well-constructed portfolio

In summary, markets and trading instruments have evolved considerably in recent years, offering enhanced liquidity, greater capital efficiency and higher capacity. Diversified relative-value alpha streams, implemented through derivatives, can help investors adapt to this new market regime by providing attractive and scalable risk-adjusted return potential with market-neutral implementation. Instead of viewing higher cash rates as a hurdle, harnessing strategies that work with cash rather than against cash makes sense, particularly in the context of a new regime where cash rates are more elevated. Deploying the right instruments in the right context with the right intent is, in fact, a recipe for a well-constructed portfolio which we believe can weather this new, more challenging market regime.

The market environment following 2008’s global financial crisis was characterized by an abundance of liquidity, effectively zero cash rates and negative correlation between stocks and bonds. With investors sensing that the central-bank ‘put’ was firmly in place to underpin markets, risky assets moved inexorably higher. Waves of central-bank quantitative easing (QE) created an inherent fragility in financial markets, with the abundant liquidity driving asset prices higher and rendering relative-value strategies less effective.

In 2020, the Covid-19 pandemic created such turbulence that inflation surged. Cash rates rose to more than 5%, eroding risk premiums and setting a high hurdle for risky assets. Traditional hedges such as government bonds did not provide diversification.

New Regime, New Challenges

This drastic change created new challenges for client portfolios. Not only did diversification diminish as correlations between asset classes became less negative or outright positive, but inflation became a risk, particularly given its uncertain trajectory. Moreover, the shift into private-market strategies during the QE era created an unintentional bias towards illiquid assets. Furthermore, high cash rates mean the net present value of long-term cash flows is now lower than during the period of QE.

Is your portfolio prepared for this new regime? Questions and uncertainty abound.

• Will the same portfolio succeed in this very different market environment?
• How should we navigate this new, less synchronous market regime?
• How should portfolios adjust to compete with a high cash rate and lower risk premiums?
• Has your portfolio compensated for the fact that bonds are now less diversifying?

One attractive solution is to use market-neutral, relative-value strategies, whose long/short structure is immune to funding costs and can offer a return stream that is uncorrelated with directional, beta strategies. These strategies are also ideally placed to exploit the richer opportunity set from the post-Covid regime of greater dispersion and heightened volatility, and are less reliant on the direction of asset-class prices owing to their flexible, long/short nature. Further, a set of measures informing long/short decisions—including carry, value, and macro fundamentals—can quickly adapt to changing conditions and provide diversification.

Alpha Diversification Opportunities

Greater dispersion across asset classes can provide attractive alpha opportunities for both long and short positions. In our view, alpha diversification is more reliable across various macro regimes than beta diversification, making relative-value decisions more resilient to macro shocks. Of course, they are not immune to idiosyncratic shocks within an asset class, but it is our expectation that any such shocks are likely to be contained and not affect relative-value opportunities in other asset classes.

Another advantage of relative-value strategies is that they can be implemented in a cash-efficient manner through highly liquid derivatives that are listed and traded on exchanges. Long and short exposures can also be achieved in synthetic form through a total-return swap. These relative-value strategies also allow investors to ‘port’ the alpha streams on top of the cash used to collateralize the derivative exposures, thereby benefiting from higher cash rates.

Recipe for a Well-Constructed Portfolio

In summary, markets and trading instruments have evolved considerably in recent years, offering enhanced liquidity, greater capital efficiency and higher capacity. Diversified relative-value alpha streams, implemented through derivatives, can help investors adapt to this new market regime by providing attractive and scalable risk-adjusted return potential with market-neutral implementation. Instead of viewing higher cash rates as a hurdle, harnessing strategies that work with cash rather than against cash makes sense, particularly in the context of a new regime where cash rates are more elevated. Deploying the right instruments in the right context with the right intent is, in fact, a recipe for a well-constructed portfolio which we believe can weather this new, more challenging market regime.