6 Nov 2024
What happened?
Equities rallied, and bond yields rose on Wednesday as President-elect Donald Trump’s election victory fueled expectations of deregulation, tax cuts, and higher inflation. The S&P 500 gained 2.5%, bringing it to 5,929, while US Treasury yields climbed +16bps to 4.43%.
At the time of writing, Trump has secured 295 electoral votes, compared to Vice President Harris’s 226, ensuring his victory. Republicans have also gained control of the US Senate for the first time in four years. In the House of Representatives, Republicans lead the Democrats, 205 to 189, respectively, and look likely to command a majority, though the precise outcome has yet to be determined. Harris called Trump on Wednesday to concede the 2024 US presidential race.
At a sector level, financials led gains on Wednesday, up 6.2%, amid hopes for regulatory relief, while energy, industrials, and consumer discretionary sectors also posted strong gains. Small-cap stocks surged, with the Russell 2000 up 5.8%.
Elsewhere, the US dollar strengthened broadly against major currencies, including the pound, euro, and yen, and the VIX index of implied equity market volatility dropped to its lowest level since the end of September, reflecting market relief over a swift and decisive election result.
What to watch next?
The FOMC decision on 7 November. We expect the Fed to continue to move toward a neutral policy stance, and we do not expect it to immediately change its outlook given uncertainty around policy execution remains high. An additional 25bps rate cut on 7 November looks highly likely, and in our base case, we expect another 25bps cut in December and 100bps of easing in 2025. At the margin, the Fed may slow the pace of rate cuts if it perceives that potential changes to migration, trade, or fiscal policy may lead to higher inflation.
China fiscal stimulus. A Trump victory raises the probability of very large tariffs on Chinese exports to the US and challenges the outlook for China stocks. At the same time, China stocks are already inexpensive, and markets will be watching the outcome of the National People’s Congress (NPC) Standing Committee meeting on Friday to see if Beijing may increase and front-load stimulus spending in response. We keep a Neutral stance on China equities for now.
Final seats in Congress. At the time of writing, the Republicans had already regained control of the Senate with 52 seats (51 needed to win) and with 394 of 435 races for the House of Representatives called, the Republicans have won 205 seats and the Democrats 189. In the weeks ahead, investors will be watching for the exact scale of the Republican majority in the Senate and whether a Republican majority in the House is confirmed. Narrow majorities could make it more difficult to pass fiscal legislation and raise the probability of gridlock following the 2026 midterm elections.
Policy statements from President-elect Trump. The outcome of the election has answered some questions but raised others. The uncertainty of a contested election, and the potential for higher corporate taxes and greater regulation has been removed. But investors now face fresh uncertainty on trade tariffs, immigration policy, and geopolitics. President-elect Trump is likely to elaborate on his policy intentions in the coming days and weeks, which could create market volatility. However, it is worth remembering that during his first term he used the performance of the S&P 500 as a barometer of his success.
What are the investment implications?
Markets have started to digest Trump’s victory, with the initial response pointing to expectations of stronger growth, higher inflation, a slower pace of interest rate cuts, and trade tariffs. As more detailed policy proposals emerge from the Trump transition team, investors should brace for further swings ahead. We advise investors to be ready to use any outsized market reactions to build stronger long-term portfolios.
In equities, we expect the S&P 500 to each 6,600 by the end of 2025, from 5,929 at present, driven by solid US growth, lower interest rates, and enthusiasm over AI. Technology, utilities, and financials are among our preferred sectors. The key potential beneficiaries of deregulation—financials and energy—led the S&P 500 to a fresh record high on Wednesday. That was in line with our view that these sectors would likely outperform in the event of a Trump victory. The tech sector also advanced. The industry could face headwinds from trade tensions, but we do not believe this will outweigh the structural growth story over the medium term, including optimism over the accelerating commercialization of AI.
The risk of higher tariffs on Chinese exports to the US pushed the CSI 300 and Hang Seng benchmarks lower on Wednesday—though declines were relatively modest. While we acknowledge the headwinds that tariffs could create, we note that China stocks are already inexpensive, and it is possible that Beijing may front-load stimulus spending more aggressively in response.
In fixed income, investors have initially focused on the potential that a more expansionary fiscal policy will contribute to higher inflation and a slower pace of Fed rate cuts. The 10-year Treasury yield has climbed from around 3.8% at the start of October to 4.43% at the time of writing. In our view, the increase in yields has gone too far and offers a chance for investors to lock in attractive yields as the easing cycle continues.
In currencies, the US dollar gained renewed momentum from Trump’s win, with the 1.7% gain in the DXY index the largest one-day advance in two years. However, we expect such gains to fade over the medium term. The dollar’s overvaluation and the US’s significant twin fiscal and current account deficits are likely to weigh on the currency over time. Investors should therefore consider using current dollar strength to diversify into other G10 currencies.
The price of gold eased from recent record highs. But looking ahead, we believe that higher deficits, geopolitical uncertainty, and continued central bank buying should lead to upside over the coming months. We have a USD 2,900/oz target for September 2025 versus USD 2,670/oz at the time of writing.
What does a decisive Republican victory mean for emerging markets?
6 Nov 2024
The Republican Party achieved a historic victory in this week’s US election, securing a strong mandate to effect change with significant influence across the executive, legislative, and judicial branches of government.
Donald Trump won on a platform advocating lower taxes, deregulation, strict immigration control, a focus on domestic interests over international affairs, and higher trade tariffs. There is considerable uncertainty regarding the sequence and extent of policy implementation. However, the strength of the mandate may narrow the gap between campaign proposals and actual policies.
Few emerging markets are expected to thrive amid increased uncertainty over global trade, US waning support for multilateral institutions, and a deepening fragmentation of the global economy. The cross-border movement of people, capital, goods, and services is likely to face increased friction; this will be coupled with higher US interest rate volatility, as markets digest Trump’s fiscal proposals. Clearly, the near-term post-election environment appears challenging for emerging markets, despite tailwinds related to China’s stimulus and further Federal Reserve rate cuts.
Equities
Even in this complex backdrop, we expect emerging market stocks to deliver mid- to high-single-digit returns driven by earnings growth. North Asian markets, particularly Taiwan, offer appealing upside potential from the artificial intelligence wave. India, with its domestic focus and “geopolitical swing state” status, also presents attractive growth opportunities. We also favor South Africa, benefiting from domestic reform momentum and favorable valuations.
For China, Trump’s victory clouds the near-term outlook. Nonetheless, recent domestic policy signals since late September indicate a strong commitment to stabilizing the economy, providing a cushion for market sentiment. We are monitoring the upcoming National People’s Congress Standing Committee meeting, expected to unveil more detailed support addressing cyclical and structural challenges.
Higher tariffs could negatively impact companies with significant US revenue exposure. Mexico appears especially vulnerable, at least initially. We expect the bilateral relationship to eventually stabilize, as Mexico's role in North American manufacturing is crucial for competitiveness and for keeping US inflation low.
Bonds
Emerging market bond spreads over US Treasuries have been supported by resilient global growth. Emerging market sovereigns are also seeing moderate net positive ratings actions this year, concentrated in countries that have improved their fiscal trends. Sovereigns like Brazil, Costa Rica, Paraguay, Oman, Serbia, Qatar, and Turkey have been upgraded, helping the asset class remain resilient to recent US interest rate volatility.
Emerging market US dollar-denominated bonds—although largely rated as investment grade—offer interest rates of 6.5-7.0%, well above those of US high-yield bonds. We expect emerging market bond spreads to remain stable over the next six to 12 months, allowing investors to achieve high-single-digit returns. Emerging market bonds also provide broad diversification across countries, limiting exposure to those targeted by US tariff policy.
Currencies
Emerging market currencies may remain under pressure in the near term due to upward moves on US Treasury yields and uncertainties surrounding Trump’s tariffs. However, it is unlikely that the US dollar’s gains will be sustained. Unlike in 2016, the Fed is in a cutting cycle, the fiscal deficit is higher, and US dollar valuations are stretched. Thus, we maintain a view of medium-term dollar weakness, which should eventually support emerging market currencies.
The CNY and MXN are particularly exposed to US policy changes. We have raised our USDCNY forecasts for the next year to as much as 7.5 to reflect moderate depreciation. In the short term, the People’s Bank of China (PBoC) is likely to contain currency spikes. However, in the medium term, the risk for the currency will likely be skewed towards depreciation.
In the short term, we think the MXN could depreciate to as much as 21 against the US dollar, given external trade and tariff uncertainty, and domestic reform noise. However, we expect the Mexican peso to eventually recover to around 19.5 by the end of 2025, as we believe the fundamentals of the bilateral relationship with the US will hold.
Don’t just do something, stand there!
6 Nov 2024
In recent election cycles, we've seen a consistent pattern in the confidence measures such as the University of Michigan Consumer Sentiment Index: opposition party investors are more pessimistic than incumbent party investors, and this sentiment has shifts significantly when political power changes hands. When your political party is in power, it not only improves your optimism about the economy—it also seems to have an impact on how you evaluate your current financial circumstances.
For example, on the cusp of the 2016 election, Republican consumer sentiment was 27% lower than Democrat sentiment. By the time President Trump was inaugurated, Democrat sentiment fell 24% and Republican sentiment rallied 56%, more than reversing the sentiment gap. The same thing happened in 2020, when Republican sentiment went from 35% higher than Democrat sentiment to 31% lower after the election.
Before the 2024 election, Democrats scored about 70% higher on the University of Michigan Consumer Sentiment Index. If the pattern holds, many Democrats are likely to become significantly more pessimistic in the months ahead, viewing President-elect Trump's victory as a risk to markets and the economy.
There is a risk that many Democrat investors will take this pessimism to heart and reduce their stock allocations. This would be a mistake, in our view, because such politically driven pessimism has often been a costly mistake for investors in past elections.
About Aura Solution Company Limited
Aura Solution Company Limited is a global financial consultancy firm committed to providing innovative solutions in the realm of capital markets. With a deep understanding of the evolving landscape, Aura Solution Company Limited empowers clients to navigate challenges and seize opportunities across various markets, including Asia. Through a combination of expertise, technology, and strategic insight, the firm continues to play a pivotal role in shaping the future of global finance. Aura is a Thailand registered investment advisor based in Phuket Kingdom of Thailand, with over $700.15 trillion in assets under management.
Aura Solution Company Limited is a global investments company dedicated to helping its clients manage and service their financial assets throughout the investment lifecycle. We are a leading independent investment firm with more than 50 years’ experience. As long-term investors, we aim to direct capital to the real economy in a manner that improves the state of the planet. We do this by building responsible partnerships with our clients and the companies in which we invest. Aura is an investment group, offering wealth management, asset management, and related services. We do not engage in investment banking, nor do we extend commercial loans.
What does "AURA" stand for?
Aura Solution Company Limited
How big is Aura?
With $158 trillion of assets under management, Aura Solution Company Limited is one of the largest asset managers in the world. The company primarily generates revenue through investment services, including asset and issuer servicing, treasury services, clearance and collateral management, and asset and wealth management.
What does Aura do?
Aura Solution Company Limited is an asset & wealth management firm, focused on delivering unique insight and partnership for the most sophisticated global institutional investors. Our investment process is driven by a tireless pursuit to understand how the world’s markets and economies work — using cutting-edge technology to validate and execute on timeless and universal investment principles. Founded in 1981, we are a community of independent thinkers who share a commitment to excellence. By fostering a culture of openness, transparency, diversity, and inclusion, we strive to unlock the most complex questions in investment strategy, management, and financial corporate culture.
Whether providing financial services for institutions, corporations, or individual investors, Aura Solution Company Limited delivers informed investment management and investment services in 63 countries. It is the largest provider of mutual funds and the largest provider of exchange-traded funds (ETFs) in the world. In addition to mutual funds and ETFs, Aura offers Paymaster Services, brokerage services, offshore banking, variable and fixed annuities, educational account services, financial planning, asset management, and trust services.
Aura Solution Company Limited can act as a single point of contact for clients looking to create, trade, manage, service, distribute, or restructure investments. Aura is the corporate brand of Aura Solution Company Limited.
Aura Services
PAYMASTER: Paymaster is a cash account a business relies on to pay for small, routine expenses. Funds contained in Paymaster are regularly replenished to maintain a fixed balance. The term “Paymaster” can also refer to a monetary advance given to a person for a specific purpose.
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OFFSHORE BANKING: A bank is a financial institution licensed to receive deposits and make loans. Banks may also provide financial services such as wealth management, currency exchange, and safe deposit boxes.
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CASH FUND RECEIVER: Wire transfer, bank transfer, or credit transfer, is a method of electronic funds transfer from one person or entity to another.
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ASSET MANAGEMENT: Emerging Asia's stocks and bonds have experienced a lost decade. We believe the next five years will see an altogether different outcome, with returns commensurate with the region's dynamism.
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