Texas Hold’Em
Monday, 24 February 2025 11:36
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A month after Donald Trump’s inauguration, we look at how assets have performed since he won the elections and discuss the Chinese surprise.
Many market developments have unfolded as written in the “Trump trade” playbook, but there have also been some surprises such as the underperformance of US small caps and the rally of European and Chinese equity markets. We see similarities between both regions, including the need for a confidence shock to boost internal demand and crucially the vulnerability to trade wars. The recent market rebound has been purely related to sentiment, not improving fundamentals.
Trade discussions
Some pessimists may argue that both regions’ stock markets enjoyed a rebound because Trump has remained pretty “mild” on tariffs so far. But with the news flow on tariffs set to accelerate in the next two months, we might see those markets giving back some of their gains.
If you play Texas Hold’ Em poker, think of the market reacting to the news flow as poker players assess their game while the dealer (Trump) distributes the cards on the table.
- In November, markets got The Flop (the first 3 cards), which suggested Trump would hit Europe and China badly.
- Instead, since the inauguration, the rather low tariff hike imposed on China and the absence of concrete tariff increases on Europe suggested he might be milder than expected. That might have been The Turn (the fourth card put on the table).
- Now, Trump is about to deal his 5th card (The River) with more announcements coming in March (Mexico and Canada) and April (reciprocal tariffs). The chances are high that he will be aggressive to squeeze his partners and get a good deal.
- Ultimately, what will matter will be the showdown when we found out who really won the game. Concretely, a final deal - hopefully more balanced – will be announced. But as he raises the stakes to secure a better deal, Trump might cause some volatility in asset prices in Q2.
What does Trump want, though? We believe he seeks more corporate investment in the US but also greater influence over the policies of US allies – arguably a new form of imperialism – and more balanced trade relationships, with the ultimate goal to relieve the US deficit (higher European defence spending vs. US defence cuts, trade tariffs).
As with any negotiation, a good deal needs to be fought for. The risk of a short-term escalation in trade rhetoric would favour US treasuries, despite the inflationary risk embedded in trade wars. It could also benefit some Defensive equity sectors, with long term yields being a key driver for many of those sectors (Real Estate, Utilities). Long-term yields will edge lower if markets fear the “uncertainty shock” of the tariff policy. In addition, another surprise from Trump 2.0 has been the more traditional Republican focus on fiscal spending, with the disruptive DOGE focused on reducing public expenditures.
Internal demand
Beyond trade though, some internal drivers have also been moving in the right direction in both Europe and China. DeepSeek has reopened the world’s eyes to China’s innovation capabilities. Xi Jinping has met with tech entrepreneurs as part of a pivot to stimulate internal growth, and Europe has unveiled its competitiveness compass vision – though with scant detail. A peace agreement in Ukraine will also benefit Europe and China if commodity prices eventually fall and sanctions on Russia are lifted in the near future.
While more domestic growth is needed in China and Europe, there are very few hard data to suggest that a recovery has begun in China. Chinese New Year data was mixed, and real estate data points are improving, although home sales momentum is fragile.
Conclusion
There is little doubt that a decent outcome (and visibility) on trade discussions is a necessary condition for the Chinese stock market to continue rising. The timing and the willingness to stimulate internal demand in China will also depend on that.
In our asset allocation, we reduced the exposure to US equities in favour of investment grade credit in USD. We also reduced Japanese equities, with the JPY appreciating, in favour of EM Asia equities to leverage i) the bottoming out of real estate indicators in China as well as the renewed pro-business stance of the authorities, ii) the attractive valuation of Korean equities and iii) some upside potential in India. We also reinitiated a long USD position vs EUR in anticipation of trade tensions.
Week ahead: Next week will see the result of German elections, inflation data points in Europe and the US, and Nvidia’s earnings. The type of coalition formed in Germany and the speed at which a new coalition is agreed upon will be key for sentiment on Europe.
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