December
2024

Market Update

EXECUTIVE SUMMARY

  • Equity markets rallied after Donald Trump was victorious in the 2024 US presidential election.
  • Bonds declined and yields rose as investors anticipated fewer US rate cuts.
  • Trump’s pro-business policies offer a brighter short-term US earnings outlook.
  • US small caps, financials, oil/gas, AI/robotics exposures and digital assets stand to benefit.
  • Higher interest rates, potential trade wars and expensive US valuations are market headwinds.

MARKET SUMMARY

US and Australian equity markets rallied after Donald Trump’s November 5th election victory, capping off a year of positive returns for all major asset classes.

Gold, International Equities and Australian Property have performed best, generating 20% + returns.

Global Infrastructure and Australian Equities have delivered 10% + returns. International Property, Cash and Australian Fixed Income have produced more modest positive returns.

This month’s newsletter examines some of the likely policies and financial market implications of a Trump presidency.

Trump sweeps to power.

  • Former President Donald Trump has won back the US presidency in convincing fashion.
  • The Republican party has retaken control of the Senate and retained control of the House.
  • This ‘clean sweep’ gives the Trump administration broader powers to enact its tax, energy, trade and regulatory
  • Equity markets have rallied on the news. Trump’s economic policies are considered business-friendly and supportive of a stronger short-term corporate earnings outlook.
  • Bond markets declined and yields increased due to increased inflation expectations, limiting the potential for interest rate cuts.

Significant Shift in US Policy.

  • Trump’s victory opens the door for tax cuts, stricter trade policy and deregulation.
  • On the tax front, Trump proposes to:
    • Extend personal tax cuts, which will expire in late 2025.
    • Cut the corporate tax rate from 21% to 20%.
    • Cut the corporate tax rate for domestic profits to 15%.

 

  • Trump has proposed import taris to make US manufacturing more globally competitive and clamp down on the flow of illicit drugs and migrants crossing the border:
    • Up to 60% tariffs on China (Trump has indicated an initial extra 10% tariff);
    • A 25% per cent tariff on Canada and Mexico; and
    • 10-20% universal tariffs (to be finalised)

 

  • Deregulation is also likely to feature under a Trump administration. Potential beneficiaries are:
    • US Financials – rolling back banking regulations.
    • US Energy – permitting reform to support the expansion of drilling for oil and gas and faster approval of energy infrastructure.
    • Big Tech – Innovation (e.g. AI and robotics), which promises increased productivity in the future. Trump may also take a softer stance against some of the antitrust policies pursued under President Joe Biden’s administration.
    • Digital Assets – Trump has pledged to make the US “the crypto capital of the planet”.
  • The US Clean Energy sector is expected to be one of the losers.
    • Trump is less supportive of clean energy, is reportedly preparing to withdraw from the Paris Climate Agreement and may scale back parts of the US Inflation Reduction Act.
    • At a minimum, any clean energy transition will be slower.
  • The US Healthcare sector also faces increased uncertainty after Trump selected Robert F. Kennedy Jr. to lead the Department of Health and Human Sciences. Kennedy has many different ideas to “Make America Healthy Again”.
  • Policy implementation will come into focus after Trump takes office on January 20th, 2025.

Likely Financial Market Implications.

In a general sense, Trump’s policies point to:

  • Higher US economic growth, higher US inflation and less room for the Fed to cut interest
  • Higher US bond yields and a stronger USD.
  • Higher short-term US earnings growth.
  • A mixed outlook for US Tax cuts and deregulation are positive. However, higher interest rates and the potential for trade wars are negative.
  • Potential outperformance of US small caps as the US economic recovery broadens.
  • Potential outperformance of US financial and energy stocks as regulation loosens.
  • Potential boost to innovative technologies such as AI and robotics.
  • Increased support for digital assets such as Bitcoin.
  • Lower global (ex-US) economic The inflationary impact outside the US could be limited if Chinese spare capacity is redirected elsewhere.
  • Potential underperformance of global (ex-US) stocks due to increased global uncertainty about trade wars.
  • Little direct impact on Australia from potential tariffs since only 4% of its exports go to the US.
  • Possible negative secondary impacts on For example, if China produces and exports less, there will be less demand for Australian raw materials. This will ultimately depend on the magnitude of tariffs implemented, retaliatory actions and other mitigating factors.

Positioning for a Trump Presidency.

  • As noted, US exposures will likely benefit most from Trump’s ‘America first’ policy stance.
  • However, with US equities trading on 22x forward earnings compared to 13x for European equities and 12x for Emerging Market equities, we would argue that much relative optimism is already factored into US index
  • This section looks at targeted ETF exposures that could benefit from a Trump presidency.
  • The BetaShares S&P500 Equal Weight ETF (ASX: QUS) and iShares S&P Small-Cap ETF (ASX: IJR) provide large-cap and small-cap US company exposure to economic growth broadening.
  • Both ETFs have higher weightings (than the S&P500 benchmark, ASX: IVV) to economically sensitive sectors such as Industrials, Financials, Real Estate, Materials, and Energy and have notably less technology exposure.
  • Trump is expected to slash US energy and financial regulation and provide fewer incentives for Clean Energy companies.
    • BetaShares Global Energy Companies AUD hedged ETF (ASX: FUEL) provides exposure to the largest global energy companies outside Australia. Approx 59% of the companies are US-based.
    • BetaShares Global Banks AUD hedged ETF (ASX: BNKS) – provides exposure to the world’s largest banks outside of Australia. Approx 37% of the companies are US-based.
  • Innovative technologies aligned with US onshoring and boosting productivity also benefit from a Trump presidency.
  • The Global X Robotics & Automation ETF (ASX: ROBO) provides exposure to a diversified global porfolio of companies aligned to the increasing adoption and utilisation of robotics and artificial intelligence.
  • About 45% of the companies are US-based.
  • Trump has also been vocal in his support for digital assets.
  • The BetaShares Crpto Innovators ETF (ASX: CRYP) provides exposure to global companies at the forefront of the crypto economy.
  • Roughly 80% of the companies are US-based.
  • The VanEck Bitcoin ETF (ASX: VBTC) is one of many listed products that provides exposure to the AUD Bitcoin price.

ASSET CLASS PERFORMANCE

Australian Equities

  • The S&P/ASX200 Index gained +3.79% in November to close at a record monthly high.
  • 8 of 11 sectors gained in November, led by Information Technology +10.38%. Xero was the standout performer, surging +16.07% after reporting a solid profit result.
  • Utilities +9.07% was the next best performing sector, bouncing back from October’s -7.23% decline. Origin Energy rose by +12.88% after analysts upgraded earnings and dividend forecasts, citing strong expected contributions from its Queensland LNG business.
  • Materials -2.72% performed worst after the latest Chinese stimulus disappointed. BHP declined -4.85%.

 

International Equities

  • The MSCI All-World Index added +4.59% in November and +27.83% over the past 12 months.
  • November was a standout month for US equities. The quick and decisive resolution to the US election and pro-business policies put forward by Trump served as a major tailwind for equities.
  • The Dow Jones Industrials Average gained +7.74%, the S&P 500 Index +5.87% and the Nasdaq +6.29%.
  • European equity markets eased as uncertainty about US trade policy weighed. Further hurting investor sentiment were profit warnings from the automotive and consumer goods sectors reflecting weak domestic and Chinese demand. The S&P Europe 350 Index declined -1.75%.
  • Japanese equities regained ground after October’s -5.37% decline. The S&P Japan 500 Index added +1.23% in November.
  • Emerging market equities (Dow Jones Emerging Market Index -2.83%) significantly underperformed their developed market peers. Chinese stocks were out of favour due to concerns of a potential trade war with the US and as domestic stimulus measures fell short of investor expectations. The S&P China500 Index lost-3.09%.

 

Property and Infrastructure

  • Higher bond yields immediately following Trump’s election victory capped gains in property and infrastructure during November.
  • Australian Property added +2.48% and International Property +1.93%.
  • International Infrastructure gained +4.12%.

 

Fixed Income

  • The Bloomberg Australian Bond Index gained +1.14% in November.
  • The 10-year Australian government bond yield peaked at 4.71% in mid-November after Trump’s election victory before easing to 4.37% by month’s end.
  • Australia is one of the few major western economies to have not yet cut interest rates. The cash rate has held steady at 4.35% for 12 months as the RBA awaits convincing evidence that inflation is headed lower.