US election update: ETF investors must consider both the near- and long-term impact on specific exposures
- 06 November 2024 (5 min read)
Since confirmation of the Republican victory in the US Presidential Election earlier this month, markets have reacted largely as we would have expected with higher bonds yields and strong performance of credit and equities. Which ETF exposures are best positioned to navigate the coming weeks and months depends on initial sentiment; actual policy decisions; and the behaviour of consumers and businesses towards Trumps proposed policies.
Donald Trump campaigned on a very clear economic platform with three main items on his list – immigration, fiscal policy and trade tariffs. The fundamental story will focus on these policies being fiscally expansionary and inflationary, and whether this will prevent the Federal Reserve (Fed) from cutting interest rates as much as the market had hoped. The initial impact could be positive for the US economy, but we might face a very different picture by the mid-term of the presidency as the impact of higher inflation and dollar appreciation feeds through. Policy uncertainty puts risky assets more at risk.
The market reaction after the election has been a continuation of what we had already seen for some time, suggesting that markets are behaving rationally. Equities (currently expensive) have gone up in price; bonds (fair value to cheap) have gone down in price.
US high yield ETF exposures look more compelling
Fixed income markets have had a mixed reaction to the result so far rising yields on US Treasuries, reflecting greater spending and inflation expectations. However, we’ve seen outperformance of European and UK bond markets, while credit spreads have tightened, especially in the US, helping to offset some volatility in government bonds.
To assess whether this will continue, we can first look at the environment we’ve seen in the run up to the election. We are in a rate cutting cycle even if that might now be a slightly shallower one than previously expected, especially in the US. That has provided a fairly volatile environment for fixed income.
Higher levels of carry and yield make for a better environment than we’ve had in fixed income for a few years, but this comes with higher volatility as the market tries to anticipate whether changes in the yield curve in the US should impact elsewhere.
When we look at global fixed income as a whole, we can observe that government bonds are responding to the positive global macroeconomic picture, while further down the credit curve, spreads are relatively tight versus history. So, credit spreads are reasonably attractive, but the current all-in yield makes US high yield ETF exposures more compelling, in our view, for the next year or two from a total return perspective.
Geographic and sectorial considers for equity ETFs
Market activity in the run-up to the election can help illustrate the logic of equity markets’ short-term reaction. Over the last year, strong relative US equity performance indicated that markets had not been troubled by election risk. This included sectors we would expect to exhibit strength from a Trump victory, such as financial services. More defensive sectors such as healthcare and consumer staples, or those exposed to China, such as materials, were weaker.
Equity markets have remained strong; falling inflation and interest rates, plus a favourable corporate earning cycle, indicate a short-term positive environment for equities. Regulations, tax, and steepening yield curves benefit domestic financials, cyclicals, small-cap and value stocks. Tariffs that could boost domestic industrials in the US (alongside domestic stimuli) could negatively impact export-led economies such as China, Korea, Germany and Mexico.
The medium term is less immediately clear, pending further clarity on how policies impact future inflation yields, interest rates, economic growth and corporate earnings. Nevertheless, US domestic industrial focus and shrinking labour means robotics and automation presents a strong, long-term structural growth trend.
We remain positive on equity markets in the short term, and optimistic on medium-term growth potential but it could more important than ever to be selective with some of the more attractive opportunities potentially being ETFs exposed to the US market, especially tech-heavy indices such as the Nasdaq-100.
Position for different scenarios
Overall, higher volatility and less valuation cover in exposures that have performed very strongly recently means prudent ETF investors need to consider more carefully how to position for potential alternatives to a ‘Goldilocks’ soft-landing scenario and a macroeconomic picture that may be more boom and bust.
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