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Weekly Market Analysis - Holding the Wheel Steady Ahead of US Elections
Posted on3 Things to Know
Citi’s CIO Keeps Global Equities O/W Ahead of US Vote
Ahead of the US elections – which might mean substantial changes in US policies ahead – we’ve updated global economic forecasts to provide a new baseline. Our world GDP estimates edge up. We continue to expect new record highs in US corporate profits next year and keep our global equity allocation 4.5% overweight this month (global fixed income and cash remain 4.5% underweight). For now, our overweight positions are generally concentrated in US assets in both equities and bonds.
GDP Forecasts for China, US Are Raised on Stronger Data
Tracking data for the US economy have been stronger than we expected. We’ve raised our US real GDP estimate for 2024 from 2.4% to 2.7%. We’ve raised 2025 from 2.3% to 2.4%. Following disappointing data this year and more aggressive policy announcements, we’ve raised our GDP estimate for China from 4.8% to 5.2% in 2025.
But Taxes, Tariffs May Alter FX, Interest Rate Outlook
Changes to US domestic tax policy and potentially large tariffs could alter the global interest rate and foreign exchange trajectory for the year ahead. Alternatively, “status quo” policies may be maintained, implying a different trend for the US dollar and many global assets. It’s not difficult to image a 100 basis point difference in US yields under opposing political scenarios.
Summary
With a consequential US election two weeks ahead, we are updating global economic forecasts with all the information that we have today. As US policy becomes clearer in the months to come, important variables could change. Tracking data for the US economy have been stronger than we expected. We’ve raised our US real GDP estimate for 2024 from 2.4% to 2.7%. We’ve raised 2025 from 2.3% to 2.4%. Following disappointing data this year and more aggressive policy announcements, we’ve raised our GDP estimate for China from 4.8% to 5.2% in 2025.
We would suggest avoiding getting caught up in a mere “moment” of volatility as markets attempt to absorb critical policy implications in the US. We should, however, be prepared to act when the dust settles. This is particularly the case if markets price in views that seem misaligned with reality.
Portfolio considerations
If US trade and tax policies don’t change, Fed rate cuts could ease a strong US dollar, benefitting the remainder of the world. Conversely, with Fed easing still strongly embedded in bond market valuations, the chance of a jump in the US dollar seems high if US trade and tax policies follow the course of Trump’s platform. Post-election US policy has been the reason why we’ve been conservative on non-US allocations, but potential opportunity is building. US equities have outperformed non-US by about 15 percentage points over the last 12 months. Broadly, Asia looks appealing for growth and valuations.
Source: FactSet, CGWI, October 23, 2024. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees, or sales charges, which would lower performance. Past performance is no guarantee of future results. Real results may vary.
Citi’s CIO Keeps Global Equities O/W Ahead of US Vote
As our Global Investment Committee (GIC) met this week, we believed that any further “gaming” of election outcomes for portfolio allocations would be unwise at this point. For many reasons, our current weightings have been skewed to expect US outperformance. Powered of late by a strong tech sector recovery, EPS growth has been faster in the US equity market than in other large regions. While EM Asia – a region we slightly overweight – anticipates double-digit EPS gains this year, Europe is expecting a 3.6% regional EPS gain, Latin America just +1.8%. This compares to a 10% gain for the US with 29% for US large cap tech shares.
The outperformance of US equities in not at the mere start. The 15 years of outperformance over non-US equities since 2009 roughly matches the longest stretch in history. This does not by itself suggest a negative outright performance. We see no other market close in size where innovation is generating such large and rapidly growing profits. But this is of course reflected in the price investors pay for US shares. Even the equal weight S&P 500 has returned 34% over the past year, a gain that is nearly nine percentage points stronger than non-US shares (we’ve held the equal weight S&P 500 overweight since August 2023).
GDP Forecasts for China, US Are Raised on Stronger Data
Optimistically, our updated economic forecast – before major US policy changes are considered – suggests a broadening of profit gains across regions and industries globally. China’s strengthening action to battle deflation could be a helpful catalyst in 2025. If the US doesn’t take strong fiscal actions to stimulate demand, US interest rates could stay on an easing track allowing global easing to proceed in line with the actions taken by key central banks this year. But if the US does stimulate demand while restricting foreign supplies, it could turn challenge the dovish narrative.
This brings us to the issue of where we might look for equity returns outside the US. In general, we would hope to add exposure highly selectively by industry, across the world’s best firms regardless of domicile. Regionally, however, Asia stands out for having markets with growth, value and positive historical performance when US rate/FX pressures ease.
A large, concentrated positioning China’s recovery is not necessary to take a more positive view. Shares across Emerging Markets and Developed Markets Asia – including a more richly priced India – trade at about 15X this year’s profits, with EPS expected to rise at a double-digit pace in both 2024 and 2025. Regional shares could also benefit from new changes to China’s economic policy to address the aftermath of a burst property bubble and industrial deflation.
But Taxes, Tariffs May Alter FX, Interest Rate Outlook
No one can be certain whether candidate Harris or candidate Trump will win or how strongly their Congressional mandate will be expressed by US voters on November 5. The former is campaigning on tax and spending increases, the latter on tax cuts and tariff increases. If any party “sweeps” it is more likely to be “Republican Red” than “Democrat Blue” as nearly three times as many Senate Democrats face election this year than Republicans.
As we highlighted in our last CIO Bulletin, prediction markets have moved in favor of former President Trump in the past month. Yet polling data for both the nation and in “swing states” are less conclusive. We believe neither of these sources can be fully trusted as results are within the statistical margin of error.
