(Source: Merlea Macro Matters)

Summary

The global economic landscape is entering a complex phase, marked by slowing growth and rising uncertainties stemming from President-elect Donald Trump’s proposed policies. Here’s a closer look at what lies ahead.

The International Monetary Fund projects slowing global growth in 2025, with challenges evident across advanced economies. Europe’s recovery remains fragile, and China is grappling with sluggish domestic demand and weak exports. While the U.S. economy has shown resilience in recent quarters, the path forward under the new administration is uncertain.

Trump is threatening a big ramp up in protectionism with a 10-20% tariff on all goods imports and a 50-60% tariff on goods from China. This would take the average US tariff rate on imports from around 2.5% to at least around 17%, a level last seen in the 1930s, and it was a disaster then!

 Key Impacts of Trump’s Proposed Policies

• Trade Disruptions: Trump’s agenda includes steep tariffs, such as a 10% universal import tariff and specific tariffs on Chinese goods. These measures could disrupt global trade, reduce growth for exporters, and provoke retaliatory actions from trade partners​.
• Rising Inflation and Stagflation Risks: Economists warn of stagflation – a combination of high inflation, unemployment, and stagnant growth. Higher tariffs, coupled with tax cuts and restrictive immigration policies, could amplify these risks and pressure consumers​.
• Market Volatility: The proposed policies are likely to increase bond yields and trigger corrections in stock markets, particularly as inflation rises. Financial markets worldwide could experience heightened instability​.
• Energy Deregulation: The administration’s focus on deregulating the energy sector may boost U.S. production but could lead to tensions with global climate initiatives.

Global Ripple Effects

Countries with strong trade ties to the U.S., such as Canada, are expected to feel the impact swiftly. Higher tariffs could disrupt key industries, while weaker trade flows may dampen GDP growth. These effects are likely to ripple through other economies reliant on the U.S. as a trading partner​. The coming months will be crucial as the world adjusts to the policy shifts from the new administration. Investors and policymakers are bracing for significant market volatility and potential trade tensions. Central banks may also face mounting pressure to address inflation while maintaining economic stability.

Bonds

Global bond markets are reacting strongly to Donald Trump’s presidential election victory, with yields climbing sharply across major economies. The shifts reflect market expectations for significant policy changes under the new administration, fuelling concerns over inflation, fiscal deficits, and economic uncertainty.

Treasuries fell sharply, propelling yields to multi-month highs as Donald Trump’s presidential election victory ignited bets on economic policy shifts that could boost deficits and inflation

Why Are Bond Yields Rising?

• Fiscal Stimulus and Deficits – Trump’s proposed economic agenda includes substantial tax cuts and increased government spending on infrastructure and defence. While these measures may boost short-term growth, they are likely to expand the U.S. budget deficit. As the government borrows more to finance these policies, the increased supply of Treasury bonds is putting upward pressure on yields.
• Inflation Expectations – Higher tariffs on imports, energy deregulation, and spending increases are expected to drive inflation upward. Rising inflation reduces the purchasing power of fixed-income investments like bonds, prompting investors to demand higher yields as compensation. Some analysts warn of a potential stagflation scenario—combining rising prices with slow economic growth—which could exacerbate the situation​.
• Federal Reserve Policy Outlook – With inflation risks on the horizon, markets anticipate that the Federal Reserve may maintain or increase interest rates to curb inflation. Higher rates typically lead to rising bond yields, as they reflect the increasing cost of borrowing across the economy​.
• Trade and Geopolitical Risks – Trump’s proposed trade policies, including tariffs on China and a universal import tax, could disrupt global trade flows. Retaliatory actions by other nations could heighten economic uncertainty. This added risk compels investors to seek higher yields on bonds to offset the volatility.
• Global Market Adjustments – As U.S. Treasury yields rise, they draw capital away from bonds in other countries. To remain competitive, international bond markets are adjusting, leading to rising yields globally. This dynamic reflects the interconnected nature of global financial systems​.

What This Means for Investors

Rising bond yields signify higher borrowing costs for businesses and consumers, which could slow economic activity in the medium term. For equity markets, this shift may create volatility as higher yields reduce the appeal of stocks relative to bonds.

Emerging markets with dollar-denominated debt may face additional challenges, as rising U.S. yields strengthen the dollar and increase debt servicing costs for these economies. The next few months will be critical as markets and policymakers adjust to the new administration’s policy direction. Investors should prepare for increased volatility across bond and equity markets, closely monitoring developments in U.S. fiscal and trade policies.

Listed Property

After a challenging two and a half years in the Australian property sector, signs of recovery are finally emerging, particularly for Australian Real Estate Investment Trusts (A-REITs). Following a tough period in 2022 and 2023, the ASX 200 REITs index has shown significant improvement, fuelled by optimistic expectations of falling interest rates, declining bond yields, and a rebound in occupancy rates for several property types.

Approaching the Bottom of the Cycle

There is growing consensus that the property market is nearing the bottom in certain sectors. Industrial logistics and convenience retail properties are already showing recovery signs, based on June 2024 valuations. However, the recovery is nuanced. For example, while industrial properties may rebound quicker, the recovery will be uneven, with longer-leased assets—previously overlooked due to lower short-term rental growth—likely regaining Favor as investors prioritise stability and consistent cash flows.

Similarly, the office property market is experiencing a structural shift. Prime-grade assets, offering higher quality and limited supply, are poised to perform better. Yet, the sector remains divided, with high vacancy rates and a focus on earnings-led recovery rather than valuations.

Retail Resilience Offers Insights

The retail sector, once impacted by the rise of online shopping, has undergone significant restructuring and is now demonstrating resilience. Recent financial reports reveal better-than-expected performance, supported by lower debt levels among A-REITs and modest gearing ratios (averaging 27%, significantly lower than global counterparts). These factors have allowed A-REITs to outperform global REITs over the past year.

• Higher Dividend Yields: Compared to global REITs, A-REITs provide more attractive dividend payouts.
• Focus on A-Grade Assets: A-REITs typically have higher exposure to premium office properties, contrasting with global REITs’ greater concentration in lower-grade assets.

Among standout performers is the Goodman Group (ASX: GMG), a leader in industrial and logistics properties. Meanwhile, overlooked players like Dexus (ASX: DXS), with a $40 billion funds management portfolio, are gaining renewed attention.

For investors, 2024 represents a prime opportunity to acquire high-quality real estate at more favourable valuations. Patience remains key, as property investments are long-term plays. The goal is to grow cash flows and achieve higher total returns over time through a combination of income growth and capital appreciation, while challenges persist, particularly in the office sector, the property market is showing clear signs of recovery. A-REITs are positioned to benefit from favourable structural and economic tailwinds, making this a positive time for investors to re-enter the market.

Australian Equities

The Australian economy shows resilience but faces nuanced challenges. Economic growth has slowed, with annual GDP growth projected at 1.5% for the remainder of 2024, reflecting softer household spending amid high interest rates. Inflation is decelerating but remains above the Reserve Bank of Australia’s (RBA) 2-3% target range, suggesting a potential easing of monetary policy starting in mid-2025​.

Inflation is coming under control but will stick around a little longer than the RBA would like.

Interest rates will eventually fall, but probably not till early/mid next year.

Donald Trump’s return to the U.S. presidency is poised to create ripples in global financial markets, with Australian stocks feeling the impact of his proposed policies. As his administration prioritises tax cuts, trade protectionism, and energy expansion, these changes present both opportunities and challenges for Australian companies.

Who Stands to Benefit?

• Energy and Resource Companies – Trump’s focus on boosting U.S. oil, gas, and LNG production bodes well for Australian energy giants like Woodside Energy and Santos. The global energy market could see higher demand and stable prices, supporting Australian producers with diversified global operations​.
• S.-Exposed Companies – Firms with substantial U.S. exposure, such as James Hardie Industries (JHX), Bluescope Steel (BSL), and Computershare (CPU), could benefit from Trump’s proposed tax cuts and infrastructure spending. Increased U.S. economic activity would likely boost revenues for these companies​.
• Gold and Precious Metals – Rising geopolitical tensions and market uncertainties tied to trade policies may elevate demand for safe-haven assets like gold. This would favour Australian gold miners, including Northern Star Resources and Evolution Mining​.

Potential Losers

• Export-Dependent Companies – Trump’s proposed tariffs, particularly on imports from China, could disrupt global trade and supply chains. Australian exporters like Reliance Worldwide (RWC) and Breville Group (BRG) may face higher costs or reduced demand if trade tensions escalate​.
• Global Players and Technology Firms – Large companies with international supply chains, such as CSL and Amcor, might experience challenges due to protectionist trade policies and higher production costs​.
• Green Energy Investments – With Trump’s likely rollback of green energy incentives, Australian renewable energy companies might encounter reduced opportunities for growth in the U.S. market​.

Sector Observation

• Financials – Firms like Macquarie Group, which have significant U.S. exposure, may benefit from economic growth but could face challenges with currency volatility.
• Consumer Discretionary – Brands like Treasury Wine Estates might gain from potential U.S. consumer spending boosts following tax cuts.
• ​While some Australian stocks stand to benefit; the outlook remains complex. Markets will react not only to U.S. domestic policies but also to global trade and geopolitical developments.

America

Predicting the medium-term impact of Donald Trump’s policies on markets is difficult, as details remain unclear. In the short term, U.S. interest rates are likely to rise, driven by inflationary measures and confidence, which can act as a self-fulfilling prophecy. If businesses and consumers believe Trump’s policies will boost the economy, they are more likely to invest and spend, creating demand and fostering growth. This short-term optimism can temporarily strengthen the economy and markets. However, confidence alone doesn’t guarantee long-term success. Policies like bank deregulation seemed beneficial in the 1990s but were reevaluated after the 2008 financial crisis. The first 100 days may see economic gains, but sustained growth depends on the specifics of Trump’s actions. There is also a risk of stagflation—high inflation, slow growth, and rising unemployment—which could outweigh initial benefits. Markets will closely watch Trump’s early moves for their impact on inflation, bond yields, and equities.

Inflation

Donald Trump’s proposed policies—such as significant tax cuts, increased tariffs, and reduced immigration—could amplify inflationary pressures. Tax cuts are expected to fuel consumer spending, while tariffs, including those as high as 60% on Chinese goods, would likely raise the cost of imports, impacting consumer prices. Additionally, reduced immigration could exacerbate labor shortages in industries like agriculture and construction, driving up wages and overall production costs. These combined factors might push inflation above the Federal Reserve’s 2% target, potentially leading to prolonged inflationary challenges.

Bond Yields

Inflationary pressures and budget deficits stemming from tax cuts and increased government spending could drive up bond yields. Higher inflation typically leads investors to demand greater returns to offset the eroding purchasing power of future bond payments. Furthermore, as deficits grow, the government may issue more debt, increasing the supply of bonds and putting upward pressure on yields. The Federal Reserve’s policy decisions will be critical; aggressive rate hikes to combat inflation could further elevate bond yields. However, if inflation expectations stabilize, this could mitigate some upward yield pressures, though the overall trend might still lean higher.

Equities

The impact on equities could be mixed. On the positive side, corporate tax cuts and reduced regulatory burdens might boost profits, particularly in sectors like energy, financials, and technology, providing short-term support for stock prices. However, the downside risks include higher interest rates and inflation, which could increase borrowing costs and reduce consumer spending. These challenges might weigh on corporate earnings over time. Additionally, tariffs could inflate input costs for industries reliant on imported goods, such as retail and manufacturing, potentially eroding profit margins. The broader equity market’s performance would likely depend on the balance between these opposing forces, as well as the Federal Reserve’s monetary policy responses.

Conclusion

While Trump’s policies might deliver short-term boosts to corporate profits and certain stock sectors, they carry significant long-term risks. Higher inflation and interest rates could undermine bond prices and weigh on equity valuations. Unfortunately, investors will likely have to expect the unexpected. Trump deliberately creates instability as a negotiating tactic. This will have ramifications for global markets in the form of increased volatility. On the bright side, increased volatility can be a boon for savvy investors as moving prices create opportunities.

Eurozone

The re-emergence of Donald Trump’s protectionist policies and his potential shift in U.S.-EU relations could significantly impact the Eurozone.

Stock Markets

European indices like the DAX and CAC 40 may face turbulence, particularly in export-driven sectors such as automotive, machinery, and luxury goods. Tariffs on European exports to the U.S. could lower corporate earnings, while retaliatory trade barriers could further pressure equities. Conversely, defence and aerospace companies might see gains if Trump’s policies spur higher defence spending across Europe, in line with his calls for increased NATO funding​.

The euro zone economy will be hit with tariffs from the incoming U.S. Trump administration early next year, according to most economists polled by Reuters, all but ensuring a series of interest rate cuts from the European Central Bank.

Interest Rates

The European Central Bank (ECB) could encounter upward pressure on bond yields, especially if U.S. interest rates rise due to Trump’s inflationary fiscal policies. This could create a dilemma for the ECB, which has kept rates low to support weaker economies like Italy and Spain. Balancing monetary policy to accommodate potential capital outflows while fostering growth will be critical​.

Political Landscape

Trump’s alignment with European populist leaders, such as Hungary’s Viktor Orbán, might intensify political fragmentation within the EU. This could further complicate fiscal and monetary policy coordination and weigh on investor confidence​.

United Kingdom

The UK faces distinct opportunities and challenges from Trump’s policies as it continues to navigate its post-Brexit economic trajectory.

Trade Opportunities

The UK might benefit from a potential U.S.-UK trade agreement, as Trump’s focus on bilateral trade aligns with Britain’s post-Brexit strategy. This could enhance opportunities for UK exporters to the U.S., offsetting some of the trade losses from the EU. However, divergence in trade policies could strain UK-EU relations, creating additional uncertainty​

Stock Market

The FTSE 100’s global exposure could cushion it from domestic challenges, as many listed companies generate substantial revenue outside the UK. However, sectors like manufacturing and retail, reliant on European markets, could face challenges if Eurozone trade weakens​.

Interest Rates and Inflation

The Bank of England might lean towards higher interest rates, especially if the UK economy aligns with a more inflationary U.S. outlook. Inflationary pressures could also rise due to higher import costs from trade disruptions and a potentially weaker pound​.

Looking Ahead

For both the Eurozone and the UK, Trump’s policies introduce a mix of risks and opportunities. While short-term gains may arise in defence and bilateral trade, broader impacts on inflation, interest rates, and geopolitical stability could weigh heavily on long-term economic and market performance.

Japan

Donald Trump’s re-election as U.S. president is poised to influence Japan’s economy significantly, particularly through the yen’s valuation and potential changes to the Bank of Japan’s (BOJ) monetary policy.

Economic Impacts

Trump’s economic policies, including tariffs and substantial tax cuts, are likely to strengthen the U.S. dollar, leading to a weaker yen. While a depreciated yen supports Japanese exporters by making their products more competitive internationally, it also raises the cost of imports, including essential commodities like fuel and food. These rising costs could accelerate inflation, putting additional pressure on households and reducing domestic spending. The yen’s recent slide to a multi-decade low against the dollar has sparked concerns. If the yen approaches the ¥160 mark, it could lead to a “nightmare scenario” of surging import costs, exacerbating inflation and further straining consumer finances​

A dollar rally triggered by Republican Donald Trump’s victory could heighten pressure on the Bank of Japan to raise interest rates as soon as December to prevent the yen from sliding back toward three-decade lows

BOJ’s Potential Policy Shift

The yen’s persistent weakness and the associated inflationary risks might necessitate a rate hike to stabilize the currency and control import-driven inflation. Analysts are increasingly forecasting that the BOJ could raise rates as soon as its December policy meeting. Governor Kazuo Ueda has signalled a readiness to consider rate increases, marking a departure from the previous cautious approach. Factors such as inflation trends, the yen’s trajectory, and wage growth will be critical in shaping the BOJ’s decision​.

Balancing Act for Policymakers

While some politicians and stakeholders are cautious about tightening monetary policy due to the potential impact on economic recovery, others emphasize the importance of preventing excessive yen depreciation. Vice Finance Minister Atsushi Mimura recently warned against “one-sided and rapid” currency movements, indicating that authorities are prepared to act against extreme volatility​.

Short-Term Gains

Japanese exporters, particularly in sectors like automotive and electronics, could benefit from the weaker yen, boosting their global competitiveness.

Challenges Ahead

Inflationary pressures and reduced consumer spending might weigh on the broader economy. A sharp increase in interest rates could also hinder economic recovery efforts.

Regional Security

While Trump has supported strengthening military partnerships to counter China’s regional ambitions, there’s apprehension that his rhetoric on scaling back U.S. security responsibilities could create uncertainty for allies like Japan, South Korea, and Australia. This may push these nations to enhance their self-reliance in defence while maintaining close ties with the U.S. to deter China’s assertiveness.

Conclusion

Trump’s victory creates a dual-edged scenario for Japan. While exporters may see immediate benefits, the BOJ could face tough decisions in balancing inflation control and economic stability. A pivot in monetary policy, including potential rate hikes, seems increasingly likely in the months ahead.

China

Donald Trump’s proposed tariffs, potentially exceeding 60% on Chinese goods, present a critical challenge for China’s economy. These tariffs target core sectors such as manufacturing, technology, and raw materials, disrupting trade and driving up costs for exporters. Supply chains are shifting, reflecting a broader trend of economic decoupling between the U.S. and China.

Economic Impacts

• Export Decline: Higher tariffs could significantly reduce export revenue, a vital pillar of China’s trade-reliant economy.
• Supply Chain Shifts: U.S.-led economic decoupling may drive businesses to relocate production to countries like Vietnam and India.
• Exacerbated Challenges: These policies could worsen existing issues, including a real estate slowdown, high youth unemployment, and weakening domestic demand.

Key Sectors Affected

• Technology: U.S. restrictions on advanced components like semiconductors threaten China’s tech industry, slowing progress in areas like AI and 5G.
• Manufacturing: Electronics, machinery, and apparel are particularly vulnerable, facing higher costs and reduced global demand.
• Energy and Rare Earths: Increased scrutiny on these exports could undermine China’s role as a critical supplier in global markets.

China’s Countermeasures

To mitigate these pressures, China is reportedly planning a $1.4 trillion stimulus package. This initiative will focus on infrastructure projects and domestic consumption, aiming to cushion the economy from external shocks. Additionally, Beijing might consider devaluing the yuan to enhance export competitiveness. However, such a move risks inflation and capital flight, adding complexity to policy decisions.

GDP Growth Projections

Analysts estimate that Trump’s policies could reduce China’s GDP growth in 2025 by 0.5% to 1.5%. This would bring growth closer to 3.5%-4%, down from higher pre-trade war levels. Key factors include: High Tariffs – Shrinking export revenues could result in a 0.5%-1% GDP reduction. Tech Restrictions – Losses in high-tech sectors might add another 0.3%-0.5% decline.

Chinese exporters have become less reliant on the US in recent years

While Trump is widely expected to ramp up tariffs in his second term, when and how this will be done are still up for discussion. We think that the 60% tariff call may be a starting point for negotiations rather than a set-in-stone number

Long-Term Adjustments

China is responding with a mix of strategies:

• Trade Diversification: Expanding partnerships in Europe, Africa, and Southeast Asia to reduce dependence on the U.S.
• Domestic Innovation: Investing heavily in semiconductors, renewable energy, and advanced manufacturing to foster self-reliance.
• Regional Partnerships: Strengthening agreements like the Regional Comprehensive Economic Partnership (RCEP) to secure trade flows.

Conclusion

Trump’s aggressive trade policies underscore the need for China to adapt and innovate. While sectors like manufacturing and technology will face immediate challenges, these pressures also drive China’s long-term transition toward greater self-reliance and economic diversification.

Emerging Markets

A second Trump administration could create significant challenges for emerging markets debt (EMD) investors due to the likely rise in U.S. inflation, growth, interest rates, and a stronger dollar. Policies such as tariffs, tax cuts, and increased fiscal spending may drive inflation and attract capital to the U.S., strengthening the dollar but pressuring EM currencies. Countries with trade dependence on the U.S. or weak fiscal positions may face difficulties, while others could benefit from trade realignment. Policy uncertainty and rising U.S. yields may widen credit spreads,

For some emerging markets, the impact of Trump 2.0 may be less acute and more related to the evolving macro environment influenced by U.S. policy. India, for example, does not have the same trade conflicts and geopolitical tensions with the U.S. as China does. Additionally, while it has a large export market which is impacted by global interest rates and currency movements, the key to India’s growth is the buildout of its infrastructure, financial penetration, wage growth, and consumption. It’s very domestically driven.

Elsewhere, Taiwan and South Korea are heavily integrated into the global technology supply chain. These markets could face headwinds if the Trump administration starts tariff offenses with multiple nations. However, we believe Taiwan is likely to benefit from continued capital investment by large U.S. tech firms into the artificial intelligence (AI) space. South Korea is a very open economy. The global auto and electric vehicle (EV) industry, in which South Korea is a big player, is very challenged and the country’s economy could face difficult times if the industry becomes subject to tariffs and trade restrictions by regional trading blocs.

Southeast Asian markets are also very much plugged into global trade and manufacturing and like North Asia would be hindered by higher interest rates and a strong dollar. But we are seeing economic growth across these markets strengthen, anchored to an extent by Singapore which is a relatively resilient market thanks to its strong banking sector and economic management. We also think Vietnam is a structurally great growth story as more Asia companies, particularly from China and South Korea, locate manufacturing hubs there. However, we are mindful that Vietnam could start to be seen as a China proxy by the Trump administration given the inward appeal it has for Chinese companies.

Given imported inflation, those countries with high imports in their trade balance, as well as running a large trade deficit, would be most vulnerable to weakness in their currencies.

Mexico is the U.S.’s biggest trading partner in Latin American markets but potentially faces significant challenges from a second Trump administration. European companies, and increasingly Chinese companies, are setting up manufacturing and assembly hubs in Mexico to gain proximity to their end markets in the U.S. and in some cases to circumvent existing tariff regulations. Compounding Mexico’s headwinds are the sweeping reforms of its new government which are raising concerns about their potential impact on the private sector.

WTIS

Trump’s Energy Policy Proposals and the Oil Price Outlook

Trump has promised to significantly reduce energy costs by increasing domestic oil and gas production, claiming he could cut energy prices by 50% within a year of taking office. Trump’s proposals focus on expanding drilling, removing regulatory barriers, approving new infrastructure projects like pipelines, and rolling back renewable energy incentives.  While increased domestic production could put downward pressure on global oil prices, experts doubt the feasibility of Trump’s claims. Oil prices are determined on a global market, influenced by supply-demand dynamics and geopolitical events. U.S. production alone cannot override these factors.

Key Proposals and Challenges

• Increased Drilling and Production: Trump’s approach aims to exploit untapped resources, citing U.S. reserves as a solution. However, energy experts note that U.S. oil reserves rank lower globally and domestic production already hit record levels in 2023, averaging 12.9 million barrels daily. Further expansion might only marginally impact prices in the short term.
• Sanctions and Geopolitical Risks: Trump’s reimposition of sanctions on Iran to restrict its oil exports could tighten global supply, likely driving up prices instead of lowering them. Such actions could also heighten geopolitical tensions in the Middle East, creating additional volatility in energy markets.
• Market Constraints: Oil companies respond to profit incentives, not government mandates. Increasing production to lower prices could hurt their profitability, making them unlikely to follow through on such policies. International producers, like OPEC, could also cut output to counteract increased U.S. production.
• Consumer Energy Costs: Experts agree it is unlikely Trump’s measures could achieve the 50% cost reduction he promises. Factors such as state regulations, electricity grid dynamics, and infrastructure limitations make substantial price drops difficult.

Conclusion

While Trump’s policies might boost U.S. energy independence and marginally reduce prices, the complexity of global energy markets and logistical challenges make his promises of halving energy costs highly improbable. Experts caution against oversimplified claims, noting that market realities and geopolitical risks play a far greater role in determining energy costs.

Gold

Donald Trump’s win over Kamala Harris carries significant implications for financial markets, particularly for gold. While the precious metal faced short-term volatility, its long-term investment appeal remains robust. Gold initially dropped 2.8% to $2,652.19 per ounce following Trump’s victory, driven by a strengthening U.S. dollar. The dollar surged over 1.5% as markets priced in higher economic growth and interest rates under the Trump administration. However, gold rebounded to $2,700 after the Federal Reserve announced a 25-basis-point interest rate cut. Spot prices rose 1.2% following the decision, signalling renewed investor confidence.

Despite initial declines, I believe gold’s reaction is a temporary “risk-on” moment rather than a fundamental shift. The long-term case for gold as a hedge against currency devaluation and financial instability remains intact. A second Trump term could increase inflation risks due to proposed tariffs, tax cuts, and stricter immigration policies. These factors may raise consumer prices and complicate the Federal Reserve’s efforts to manage inflation. Such an environment typically enhances gold’s appeal as a safe-haven asset, especially amid potential geopolitical uncertainties.