The very large victory of Donald Trump and more generally of the Republican camp – which controls both the House and the Senate – reassured the markets, removing many uncertainties and offering investors significant visibility in terms of future economic policy.
The essentially pro-growth measures advocated by Donald Trump should in fact entail a reduction in regulation affecting sectors such as energy and finance as well as new tax reductions with, on the one hand, the extension of measures adopted during his first mandate and, on the other hand, new tax cuts in favor of businesses. The increase in customs duties – the objective of which is to encourage domestic production by raising the price of imported products – is, on the other hand, inflationary and harmful to world trade. Activity in China and by contagion in Europe, Germany being the most exposed country in the region, should be penalized by this measure.
Strong nominal growth and higher inflation
For the United States, nominal growth should remain well oriented. Inflation expectations reflected in the American bond markets have rebounded slightly in recent weeks, while remaining at reasonable levels, close to 2.4% on annual average for the next five years. The prospects for solid expansion of activity have led to a reduction in expectations of rate cuts: the market now only expects three cuts of 0.25% by the end of 2025, this less aggressive easing of monetary policy American economy contributing to the recent rise in the value of the dollar.
The public deficit of around 7% of GDP and the sharp increase in debt in the United States do not (yet) worry investors. The country indeed benefits from very strong competitive advantages – military, energy, technological power, the dollar constitutes the main reserve currency – vis-à-vis the rest of the world. Since the 2008 financial crisis, productivity – the engine of growth with demographics – driven by massive investments in technology, has increased by just over 30% in the United States, a rate approximately three times higher than the progression observed in the euro zone.
A weakened euro zone
In the euro zone, in a context marked by sluggish growth, the political crisis in France is likely to further weaken the confidence of businesses and households.
Following the motion of censure against the government of Michel Barnier, France, placed during the summer by the European Commission in excessive deficit procedure, now finds itself without a finance law. Emmanuel Macron, unsurprisingly, announced that he would appoint a new Prime Minister as soon as possible.
-A temporary closure of the administration (“shutdown”) is very unlikely, which explains the relatively limited tension observed in French rates. The spread with Germany has certainly increased, but the 10-year rate remains below 3%, or around 0.5% below its peak reached at the beginning of July.
If the deficit objective of 5% of GDP in 2025 now seems out of reach, it is nevertheless urgent to restore a credible budgetary trajectory, without excessively weighing on growth, a complex equation in a political landscape marked by the growing weight of populist parties.
In this complicated context, to say the least, the ECB should continue monetary easing with rate cuts which, according to market expectations, should reach 1.5% by the end of 2025. Furthermore, we can only welcome the call from the President of the Bundesbank who calls on the next German government to make greater use of the available budgetary room for maneuver in order to invest in particular in infrastructure and defense and thus stem the stagnation of the German economy.
Growing markets in the United States
American stock markets reacted positively to the election of Donald Trump, increasing by around 6% in local currency. European and emerging markets have shown much more limited progress since the election result.
Impressive profit growth among technology companies is benefiting the US market. The latter appears to be quite expensively valued on the basis of different measures, both absolute and relative. Quality at a price. Let us also remember that the link between valuation and performance only holds in the long term. In comparison, valuations appear more attractive in Europe. However, as this market is more cyclical, a recovery in activity is essential to boost profits and the performance of stocks in the Old Continent.
