Market Update - November
Trump presidency increases inflation expectations
Donald Trump defied the odds to become the oldest elected president of the US. Investors must now absorb the reality of a president who has promised to create 25 million jobs and build a wall across the border with Mexico. The election result has confirmed the anti-establishment theme, a clear political risk in Europe in the coming year. President elect Trump is likely to pursue policies that are perceived as pro-business. This, alongside expected increases in infrastructure spending, is likely to boost short term US growth and inflation. As a result US bond yields have moved upwards, as have US equities and the dollar.
Emerging Markets potentially more vulnerable
The likelihood of increasing trade tariffs could raise risks for emerging markets, particularly those that are more export led, although the underlying structural drivers of growth are likely to remain intact, including robust domestic demand. The initial reaction to the US election result has been weaker emerging market currencies and equity markets. Global economic growth may be hampered by restrictions on free trade, raising the risk of a stagflationary scenario in which low growth and higher inflation persist.
Diversification in uncertain times
The change in inflation expectations, accelerated by the US election result, is likely to have marked an important turning point for bond markets, with yields now adjusting upwards and prices falling. We retain our underweight positions, instead favouring absolute return approaches where appropriate. Within equity markets, growth companies whose prices are determined by long bond yields have underperformed and we have seen the market rotation towards value approaches continue. Ongoing political and economic uncertainties underline the need for diversification, which we believe will help our charity portfolios throughout the anticipated amplification in market volatility.
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