CoreMacro

As Trump’s victory odds rise, the underperformance of European equities deepens. How negative would a global trade war be for European assets?

Don't buy the dip. The equity bull market is over. The US will enter a recession in late 2024 or in early 2025.

Brazil’s two macro demons – a rising public debt-to-GDP ratio and inflation – have resurfaced and will worsen over the coming months. Yet, President Lula will pay lip service to fiscal concerns without enacting meaningful cutbacks. In addition, a politicized COPOM will cut rates aggressively next year and fall behind the inflation curve. All in all, the selloff in Brazilian markets still has legs.

The real threat to European equities is growth, not political risk. How low will Eurozone earnings fall during the coming recession and how much will equities decline in response?

The conventional wisdom is wrong: Trump is not going to substantially cut taxes once in office; he is going to raise taxes by jacking up tariffs. To the extent that this dampens economic activity, it is bad news for stocks but good news for bonds.

Special Report

The failure of EM stock prices to rally over the past 13 years is rooted in their companies’ inability to grow their profits. Even though EM equities appear cheap based on their cyclically adjusted P/E ratio, there has been a regime change in EM corporate profitability. Therefore, the CAPE model should not be used to value EM stocks now.

The French stock market has never been so cheap versus the US. And its sharp underperformance on its recent political events is irrational given the CAC 40’s limited exposure to French domestic economics and politics. This provides a great buying opportunity both tactically and for the longer term. Plus: stocks versus bonds approaching a potential consolidation phase.

At first glance, France has moved to the far left. However, this coalition is fragile, and Macron’s allies still hold the balance of power. What are the assets that will benefit from this new political setup, and those that will not?

Although we ticked a second box on our checklist, the incoming data still do not indicate that a recession is imminent. We remain tactically equal weight equities with a strong bias to underweight them, but we’re not exiting the party just yet.

Special Report

Is the RMB cheap or expensive? Based on trade accounts, the yuan is inexpensive, but the RMB is vulnerable due to capital outflows. Yet, Beijing will not resort to a rapid devaluation for now, and the option of floating the currency is improbable. The PBoC will allow a gradual depreciation of the yuan versus the dollar, say around 5%, in the next six months.