From the Desk of GFC - Mid-February 2025
Global Financial Consultants Pte Ltd (GFC)
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What happened over the last month?
After the “risk-off” month we reported in mid-January, markets bounced back, apparently enthused by Trump’s return to the Oval office and the slew of pro-USA executive orders and announcements that has since emerged.?
January jobs figures in the US came in cooler than hoped, Nonfarm payrolls rising by 143,000 (below the 170,000 expected), but with revisions pushing December’s already hot 256,000 figure up to 307,000.? Unemployment in the US fell again, from 4.1% to 4.0%, and January CPI (Consumer Price Index) increased from 2.9% in December to 3.0% year-on-year, sadly breaking the series of sub-3% figures seen over the previous six months.
As a result of all the above,?
compared with my mid-January update, when looked at in USD terms.? For clarity, I’ve included on the chart below:
over the same 1-month period.?
Global Equity Markets, EUR, SGD, GBP – 3-month view (in USD terms)?
What’s on the horizon?
1. Inflation, Central Bank policy & Trump
Following the Fed’s decision to leave rates where they were in January, even as Trump heavily hinted that they must fall further, the most recent inflation print (the highest monthly increase since August 2023) suggests that the Fed were correct to do so. The futures market continues to price in just one 0.25% cut in 2025, according to the CME Fed Watch tool, resulting in a 400-425 target range (vs. today’s 425-450 range) and a 22% chance that we will end 2025 with no rate cuts at all, all of which is reflected in the continued strengthening of USD vs. other major currencies.?
Trump’s return to office on January 20th has initiated a blizzard of domestic and geopolitical activity from his administration.? One significant announcement (among many) was that the US would withdraw from the OECD global tax agreement which imposed a minimum 15% corporation tax and this, in itself, may give the US a competitive advantage going forward, as a lower-tax jurisdiction for multinational enterprises to relocate to).??
Trump has also launched an initiative to identify trading partners which have been “discriminatory” against US companies (the UK and Europe being obvious examples regarding their various legal wrangles with and fines for “Big Tech”) with a view to punishing these partners accordingly, with tariffs.? Whilst not actually imposing them, as threatened, on his first day in office, Trump signed executive orders on February 1st imposing 25% tariffs on imports from Mexico and Canada, with a 10% tariff on Canadian oil and energy exports, and an additional 10% tariff on imports from China.?
How this will all play out is impossible to say, but one surprising fallout of the uncertainty has been that US investors have shifted towards undervalued “international” stocks over the last month, with Europe and Hong Kong outperforming US equities.? European markets may also be benefitting from Trump’s recently announced plan to meet Putin, with a view to ending the Ukraine war.
2. Elevated Equity Valuations vs. Corporate Earnings
Referring to the gauges below we see that US equities have moved from “fear” to “neutral” sentiment territory and remain “overvalued” vs. historical averages.
US Market - Valuation & Sentiment gauges (click images to view detail)
That said, we must re-reiterate the point that equities can stay expensive (or cheap) for long periods of time and therefore that valuations are not a useful signal for market timing.??
It’s worth acknowledging that Q4 earnings in the US demonstrated robust growth of 16.4% year-on-year, well above the five-year average of 10.4% and marking the sixth consecutive quarter of earnings growth.? So, whilst the S&P 500 forward P/E is still standing at around 22, the fact that the prices of US equities are being propelled by such consistent growth in the “E” of the “P/E” gives some reassurance, for as long as this ability to beat earnings estimates persists, of course.??
With Trump in power and pulling every available lever to attempt to reinforce US economic dominance, it would be foolish to bet too much against the US market.? A neutral market-cap weighted exposure to global equity, though, still seems to be a very sensible default, with even long-unloved parts of the global equity market apparently now becoming attractive to US investors, as mentioned above.? We just need to be mindful of the fact that the largest portion of the MSCI All Country World Index (ACWI) continues to be the US component, at 66.4%.
Conclusion
Whatever your view on Trump, the fact that he is now in office and making clear his agenda is a positive for markets (which famously dislike uncertainty) even as some of those policies, ironically, introduce a great deal of uncertainty.? It makes sense that a recent poll of CEOs identified “Intensified global trade wars” as the #1 risk in 2025, as neatly summarised in this article from AXIOS.
One positive to note from this poll is that the “actual” wars (in the Middle East and Ukraine) which appeared high in the 2024 list have retreated somewhat as perceived risks, and this can only be a good thing.? 2025 is shaping up to be a very interesting year and, on balance, I believe, a positive one for global markets.
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