Market Review: Navigating Post-US Election Uncertainty – Wilson Asset Management
Following the recent US election, investors are facing a rapidly changing economic landscape, particularly in terms of inflation and interest rates. The debate continues over whether the policies of former President Trump lean towards inflation or deflation. Interestingly, while the Federal Reserve is lowering rates, long-term interest rates are on the rise, exacerbated by indicators showing an increase in inflation. This situation has led to uncertainties in valuation for stocks, especially as the upward trend in long-term rates impacts stock performance. However, the appointment of Scott Bessent as the US Treasury Secretary has brought some relief to markets as he aims to stabilize fixed-income volatility and promote growth.
The US economy seems resilient due to the fiscal stimulus measures in place that are expected to provide ongoing support. In contrast, China’s economic outlook appears more cautious, with Trump’s policies creating challenges for China’s external sector, affecting both exports and capital flows. While China has implemented small-scale stimulus measures, broader economic issues such as demographic pressures in the property market, low private sector confidence, excessive local government borrowing, and the threat of capital outflows pose significant challenges. The hope lies in the potential for more substantial stimulus efforts, which may require yuan devaluation to ease monetary restrictions – a move with its own risks.
Despite challenges in China, Australia is seen as a safe haven for global investors amidst the economic uncertainties in China. Investments in Australian banks tend to increase during periods of turbulence in Asian markets. Domestically, there is speculation about early rate cuts from the Reserve Bank of Australia (RBA) to align with global central banks’ trends in lowering rates. While these cuts could support the economy and reduce recession risks, concerns about inflation persist due to factors such as low unemployment rates, ongoing fiscal stimulus efforts, and a weakening Australian Dollar.
In terms of market outlook, growth stocks have displayed resilience despite rising interest rates, supported by a decline in interest rate uncertainty. Moving forward, with limited room for further declines in rate uncertainty, growth stocks may face challenges. If growth and inflation rates begin to rise, fixed-income markets could start to discount further rate cuts or anticipate rate hikes. As a result, the predictability of the Federal Reserve’s next actions may diminish, leading to increased uncertainty around interest rates that could impact growth stock performance.
Another concern is the concentration risk in equity markets, particularly driven by a few mega-cap technology and growth stocks often known as the ‘Magnificent Seven’. The performance of companies like Apple, Microsoft, Amazon, Alphabet, Meta, Nvidia, and Tesla significantly influences indices such as the S&P 500 and Nasdaq. In the face of rising rates or uncertainty levels, investors may need to reconsider their exposure to these dominant companies and diversify into less crowded, undervalued areas of the market. Building resilient portfolios in changing economic conditions could involve investing in quality undervalued international growth companies and taking advantage of market mispricing opportunities.
