As the United States shifts to “America First” policies following the decisive victory of President-elect Donald Trump, investors must stay on the right side of these trends and avoid geopolitically exposed assets.
“This means focusing on low-risk, liquid assets that are grounded on the rule of law. Concretely, that includes the US, Swiss and European assets. Emerging markets and their associated asset classes are less appealing,” says Michael Strobaek, global chief investment officer of Lombard Odier.
Another market in the first category that Strobaek does not cite but which is cited by the BlackRock Investment Institute (BII), is Japan.
In its most recent weekly commentary, BII suggests that investors “zero in on secular forces, not cycles”.
“Market-moving events can highlight structural shifts underway. Our investment leaders grapple with the implications of a world shaped by supply,” the institute says.
Short-term positive environment
Various asset managers more or less reflect this view with expectations that developed market equities will remain broadly attractive in the short to medium term, while fixed income allocation must be more strategic.
“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,” says Dominic Byrne, head of global equity at AXA Investment Managers Core.
Japanese equities also provide some opportunities in the short term. “A brighter outlook for Japan’s economy and corporate reforms are driving improved earnings and shareholder returns. Yet the drag on earnings from a stronger yen and some mixed policy signals from the Bank of Japan are risks,” says BII head Jean Boivin.
Fixed income also continues to provide opportunities, although investors have to be more strategic in their asset allocation going forward as volatility continues to plague the market on the back of uncertainty over the inflation rate and interest rate trends.
“Fixed income returns have been broadly positive over the past 12-18 months, even if not in a straight line. 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,” says Nick Hayes, head of active fixed income allocation and total return at AXA Investment Managers Core.
Domestic economic measures
In terms of asset allocation, the income cushion bonds provide has increased across the board in a higher rate environment. “We like quality income in short-term credit. We’re neutral long-term US treasuries,” according to BII’s weekly commentary.
“‘America First’ will deregulate key industries, lower personal and corporate taxes, and introduce tariffs. Domestically, this will lead to higher US nominal growth, higher inflation and interest rates. The US will focus on domestic economic measures and scale back its foreign interest and ambitions. The rest of the world will have to respond with their own policy changes. Europe, Asia and the Middle East are already feeling the impact (before the new administration takes office). For investors, this shifts the risks, and the opportunity set,” says Lombard Odier’s Strobaek.
In Asia, specific markets, particularly Asean and India, are expected to present investment opportunities despite some risks from the likely fallout that would arise from the new US policies, particularly new tariffs that would impact existing supply chains.
“Within Asia, we are focused on high-quality bonds that can offer investors attractive total returns. We remain highly focused on the opportunities that exist within Asia and in particular Asean and India. However, geopolitical uncertainty may hamper growth if supply chains become disrupted or commodity prices rise. This may fuel inflation. A key risk would be the in-sourcing of supply chains that may exclude markets in Asean,” says Vis Nayar, chief investment officer of Eastspring Investments.
Asia is currently the world's second most integrated trade region after the European Union (EU), with nearly 57% of trade value originating within the region – an increase of 3% over the past 20 years, in contrast to declines in other regions. Trade between Asean and China grew by 8.1% in early 2024. Several agreements, including the Regional Comprehensive Economic Partnership (RCEP) and the Asean-China Free Trade Agreement 3.0, are deepening these ties, with the latter focusing on the digital economy, clean energy, and climate change, according to Nayar.
“The geopolitical tensions during 2016-2020 (during the first Trump administration) and the advent of tariffs related to goods from China prompted a shift towards a China+1 supply chain strategy to mitigate these impacts. This benefitted markets such as Vietnam and Thailand as well as India,” he says.
