In the wake of the U.S. presidential election, global investors are reevaluating their strategies, moving away from trades based on the assumption that President-elect Donald Trump’s economic policies would significantly favor the U.S. while adversely impacting global markets. As optimism for U.S. assets gives way to caution, money managers are finding opportunities in undervalued international markets that have suffered from pre-election pessimism.

A Changing Narrative in Global Markets

The initial market reaction to Trump’s victory was characterized by a surge in U.S. stocks and the dollar, accompanied by a decline in assets tied to regions such as Europe, China, and emerging markets. Many investors anticipated that Trump’s proposed tax cuts, infrastructure spending, and potential tariffs would stimulate the U.S. economy but create headwinds for global trade.

John Roe, head of multi-asset funds at Legal & General Investment Management, observed that the prevailing narrative was overly simplistic. “The thesis that Trump is good for the U.S. and bad for the rest of the world is a very common narrative,” Roe stated. This perspective led to excessive selling of non-U.S. assets, creating opportunities in undervalued areas such as European auto stocks and the Mexican peso.

Spotlight on Emerging Bargains

European auto stocks, for instance, reached a two-year low following the election. Simultaneously, the Mexican peso dropped over 2.5% against the dollar in November, and the British pound fell roughly 5% since late September. These trends prompted asset managers like Shaniel Ramjee of Pictet Asset Management to increase their exposure to assets in China, Brazil, and Mexico.

“There will be a really good opportunity in assets that have weakened ahead of and after the election,” Ramjee said. His firm increased holdings in Chinese stocks and Brazilian bonds, citing undervalued markets as having significant growth potential.

Michael Field, a European equity strategist at Morningstar, highlighted the potential for swift rebounds in pessimistic markets. “The news flow [for non-U.S. markets] is so negative right now that any kind of good news could move things quickly,” Field noted.

Diverging Asset Performance

Since the election, U.S. stocks have risen over 4%, while European equities declined by about 1%, and emerging markets hit two-month lows. The dollar strengthened significantly, pushing currencies like the euro, pound, and Mexican peso to multi-year lows.

Bond markets reflected heightened inflation expectations, with U.S. Treasury yields jumping 14 basis points to 4.47% after the election. Rising yields mirrored expectations of higher U.S. interest rates, driven by Trump’s proposed policies.

Despite this, some investors believe that markets may have overestimated the inflationary impact of Trump’s agenda. Barclays economists, for instance, argued that even if Trump implemented a 60% import tax, the tariffs would likely be introduced gradually, mitigating their impact on global economies like China.

European Markets Under Scrutiny

Europe remains a focal point for investors, mired in challenges such as Germany’s political instability and fears of a declining export sector. Stocks like Volkswagen have been trading at historic lows relative to forecast earnings, while broader European chemical producers have seen a sharp decline.

Benjamin Melman, chief investment officer at Edmond de Rothschild Asset Management, has chosen not to exit European markets entirely, keeping his exposure at neutral levels. Melman highlighted the potential for European Central Bank rate cuts to stimulate economic activity in the region.

Adding to the optimism, Ramjee and other investors have begun reallocating funds toward Chinese equities, seeing these markets as undervalued relative to their growth potential.

Reassessing the U.S. Outlook

While U.S. markets have rallied post-election, some investors question whether Trump’s policies will lead to sustained growth. Tariffs and other trade restrictions could increase consumer prices, creating political challenges.

Ramjee noted that Trump would likely focus on avoiding inflation spikes, which could alienate voters. He remains cautious about U.S. Treasuries but expressed interest in re-entering the market if yields rise further.

Craig Inches, head of rates and cash at Royal London Asset Management, has already taken profits from pre-election trades that benefited from rising inflation expectations. He sees opportunities in UK government bonds, which he believes are currently undervalued.

Global Growth Prospects

Sheldon MacDonald, Chief Investment Officer at Marlborough, anticipates that Trump’s policies could boost global trade, minimizing adverse impacts on overseas economies. “What’s good for the U.S. tends to be good for the rest of the world,” MacDonald said. He favored the UK’s exporter-heavy FTSE 100 index over more expensive U.S. equities, citing its recent underperformance as an entry point.

Despite these views, many investors remain cautious, recognizing that the global economic landscape under Trump’s leadership could evolve unpredictably.

Key Takeaways for Investors

1. Opportunities in Undervalued Markets: Markets in Europe, Mexico, and China have faced significant selloffs, presenting buying opportunities for long-term investors.
2. U.S. Inflation and Interest Rates: Rising yields and inflation expectations in the U.S. could create volatility, prompting caution among bond investors.
3. Tariffs and Trade Policies: While tariffs pose risks to global trade, gradual implementation could mitigate their impact, providing time for markets to adjust.
4. Diversification Across Regions: The divergence between U.S. and non-U.S. markets underscores the importance of geographic diversification.

As markets continue to digest the implications of Trump’s economic policies, investors are shifting focus from immediate reactions to long-term opportunities. While uncertainties remain, the recalibration of global portfolios highlights the dynamic nature of market strategies in response to political developments.

(Adapted from USNews.com)

Categories: Economy & Finance, Strategy