November market convictions post US Elections

I can however advance, with some degree of confidence, that the United States is not about to reduce its budget hole. Spending is expected to increase by $5.8 trillion over the next 10 years, while the deficit is already estimated at 6.5% for this year and next. And, it is foreseeable that the deficit increase to 8%, or even more, in the years to come. This situation is unseen in an economy that is still, despite everything, close to full employment.

This should reinforce ongoing trends:

• A solid American growth rate, supported by consumption, that continues to increase by around 4% per year.
• Sluggish European growth, weighed down by the problems of its two main economies: France and Germany. Leading indicators do not predict any improvement in the near future, even if the increase in real wages should gradually restore consumption.
• And finally, the Chinese government which will likely continue to unveil fiscal stimulus plans in order to reverse the negative spiral of its real estate market and combat the probable increases in American tariffs. The first measures announced a few weeks ago already seem to be bearing fruit.

More generally, while inflationary risk appears contained for now, central banks could be challenged in the coming months, given current uncertainties. The Fed in particular will have to change its rhetoric: Namely because the American economy is doing well and its labour market does not seem to be deteriorating significantly, and secondly, in response to a potential rise in inflation as a result of Trump policies. The ECB, which does not like to decouple its monetary policy from that of the Fed, might have to choose between maintaining a restrictive bias or accepting a fall of the Euro and its consequences.

Bond markets are currently anticipating terminal rates close to 4% in the United States and 2% in the Eurozone. We consider this as “restrictive” in both zones but probably necessary in a world where budgetary policies are so accommodating.

In this context, it seems justified to approach the coming months with measured bias. We maintain our positive bias on equity markets with a clear preference for US stocks for multiple reasons: a better economic climate, upcoming tax cuts, profit growth that the Eurozone can only dream of and innovation that is still present. On the credit side, and despite narrow spreads, we maintain a rather positive bias on both Investment Grade and High Yield. Lastly, we are taking advantage of the current rise in long rates to gradually increase the duration of our portfolios with a preference for the Eurozone.

This commentary is provided for information purposes only. The opinions expressed by the author are based on current market conditions and are subject to change without notice. These opinions may differ from those of other investment professionals. Published by La Française Finance Services, head office located at 128 boulevard Raspail, 75006 Paris, France, a company regulated by the Autorité de Contrôle Prudentiel as an investment services provider, no. 18673 X, a subsidiary of La Française. Crédit Mutuel Asset Management: 4, rue Gaillon 75002 Paris is an asset management company approved by the Autorité des marchés financiers under n° GP 97 138. Public Limited Company (Société Anonyme) with share capital of €3,871,680, RCS Paris n° 388 555 021, Crédit Mutuel Asset Management is a subsidiary of Groupe La Française, the asset management holding company of Crédit Mutuel Alliance Fédérale.