UBP House View - November 2024

Trump's return to the White House marks the start of a new era that is set to boost US-based companies while the wider global investment landscape continues to contract. 

Key Takeaways

Editorial

Investment universe contracts

Trump is back. His unsurprising return to the White House signals a new political era poised to deliver a stronger-than-expected economic boost, driven by business-friendly policies and lower taxes. In light of this shift, we have upgraded our conviction on US equities from 3/5 to 4/5, as the US remains our favourite market in an increasingly fragmented economic world.

Indeed, the investment landscape continues to contract, with the eurozone becoming more complex to interpret and continental Europe growing more polarised. Switzerland and Scandinavia, however, stand out as hubs of 21st-century growth and innovation. Meanwhile, performance across Asia remains dispersed: China is an unstable market, likely to face added pressure from higher tariffs under Trump’s policies, while India is well-positioned to fuel regional growth. Meanwhile, in Latin America, assessing prospects remains a challenge due to political unrest.

Reflecting this, the rise in ETFs cannot fully meet the demands of a disparate growth environment, which requires greater granularity and a deeper understanding of the various markets. To navigate this and identify the most promising regions, a more active approach is essential.

Strategy

When higher bond yields may begin to bite for equities

In October, we noted that the 50 bps rate cut and guidance for aggressive rate cuts delivered by the Fed in September would equate to US 10-year yields likely trending towards 4.5% as they have in recent weeks. However, a bottoming in inflation – as we expect in 2025 –, combined with increased spending expected from the new Trump administration, leaves investors facing further upside risks on US bond yields in the year ahead.

Against this backdrop, our caution on long-maturity, low-risk bonds has proved warranted, with risk-free and investment-grade bonds underperforming high cash yields in 2024 despite exposing investors to more meaningful interest rate volatility. In contrast, though, the rise in long- term bond yields since their September low has not been a hindrance to equities; this may begin to change as we enter 2025.

Indeed, to the surprise of many, US equities have been resilient to rising bond yields not only since September, but also since their 2020 lows. We ascribe this resilience to the unwinding of the historical “cheapness” of US equities relative to all-time-low bond yields through much of the 21st century. In other words, as bond yields have returned not only to their pre-pandemic levels but to levels seen at the turn of the century, comparative equity valuations could return to the levels they saw more than two decades ago.

For investors, this process of unwinding the historical cheapness of equities can continue through year-end. The 2024 rally in equities as bond yields have largely moved sideways leaves US equity valuations compared with current bond yields only back at their averages seen from 1987 to 2002. It would take bond yields continuing on their path to reach 5% and beyond before equity valuations compared with bond yields become more extreme.

For bond investors, relative value/arbitrage strategies have historically delivered bond-like carry without the same degree of interest-rate volatility as bonds, and can offer shelter should bond yields continue their rise in 2025. Equity investors can look to macro and long/short strategies once bond yields near 5% to capitalise on the prospect of volatility in equities should this transpire.

US equity valuations remain fair relative to bond yields, even given the recent rise in Treasury yields.