November 7, 2024 • 20 mins
Donald Trump is the 47th president of the United States, in a landslide victory for the Republican party. As markets get more certainty, what are the potential impacts of macroeconomic policies, tariffs, and global trade dynamics for investors?
We are excited this month to bring you Fidelity’s Global Head of Macro and Strategic Allocation, Salman Ahmed, to discuss the implications of the recent US election results looking closely at the impact of tariffs on inflation, China's economic stimulus measures, and the broader implications for markets and equity sectors. Salman also shares his insights on the risks to our previous soft-landing scenario and why he is optimistic about equity markets amidst the evolving economic landscape.
We’d love to hear from you! If you have any topics or speakers you would like to see on the show, email us at podcastsaustralia@fil.com
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This episode was recorded 7 November 2024.
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Episode Transcript
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S1 (00:06):
Hello and welcome to Sound Bites. Fidelity's monthly podcast where
we talk about all things investments. My name is Lucas
de Pourbaix and I'm from Fidelity International, and I'm pleased
to be joined this month by Fidelity's global head of
macro and strategic asset allocation, Salman Ahmed. Salman has over
25 years of investing experience, holds a PhD and Master
of Philosophy in Economics and Finance from Cambridge. His role
(00:29):
at fidelity sees him and his team oversee our broader
global macroeconomic inputs that feed into our various investment teams,
as well as our strategic asset allocation process. We're excited
to have someone of Salman's caliber on the show. Welcome, Salman.
S2 (00:44):
Thank you. Thank you for having me.
S1 (00:46):
And before we get into the nitty gritty and today's discussion,
not surprisingly, is really going to be focused on the
the big event everyone's talking about. And that is the
US election. But before we get into that, I'm always
interested in in the people that I speak to. And
one of the things I know you're very passionate about
is cricket. And from what I understand, uh, Australia is
(01:06):
playing Pakistan tomorrow in Sydney, I believe. So tell us
about your passion for cricket.
S2 (01:14):
Oh, definitely. I mean, to be fair with you, I
have a lot of respect for the Australian team. I
wish my team could learn a thing or two from
from the Aussies, but. Yeah, I mean, but Pakistan is Pakistan,
so I don't know if you followed the series against England.
We beat them for you guys. So you can, uh,
you can then uh, go into ashes with a different perspective.
But yeah, it's still every team's dream to beat Australia
(01:37):
and Australia. And I hope it will happen in my lifetime.
S1 (01:39):
Yeah, well, we'll see what happens. And yeah, good luck
to both teams, I guess. But let's kick off the
podcast because, you know, if we sort of start off
with things and it's been an interesting couple of days,
there's been a lot of speculation, you know, who's going
to win. The pollsters were saying it's going to be
a very tight race. Now it's actually ended up being
a resounding win for the Republicans, winning the popular vote.
(02:00):
The Senate and I believe they've also won the House
as well. So pretty much full control and a pretty
broad mandate in terms of their policy agenda. And I
guess in terms of the policy agenda, what are some
of the key things that you believe we should be
watching and observing in terms of policy, particularly from a
macroeconomic perspective?
S2 (02:21):
Sure. No, definitely. I think as you as you mentioned, Lucas,
I think the final results are that President Trump is
outperformed the polls by 2 or 3 percentage points across
the board. So that's the challenge for the polling industry.
I think they are getting it or his nature of
his support. Wrong now consistently. But that's for the polling
industry to sort out. But the betting markets, to be
(02:42):
fair with you for most period over the last few
weeks have been around plus 60% plus. And then they
had this volatility going to the elections. But you know
on general the tilt had been towards a potential Trump victory.
But also I think one of the scenarios which was
probably underpriced was the red sweep. So which is that,
you know, if President Trump wins, it was very likely
(03:05):
as well that he would carry with him the down ballots.
That said, obviously the Senate election was much more comfortable,
but the House came very, very close. And it's likely
the majority in the House of Republicans may be smaller
than the last time around. So there are some nuances there.
But the reality is that we are looking towards a
red sweep, which is quite different from a divided government
(03:28):
when it comes to fiscal policy. So there are two,
I think, components of macro economic policy we are focused
on and have been focused on for many months now.
We've done a lot of work on, you know, what
happens if tariffs are put in as they are being discussed.
We've also done the work on fiscal deficits impact and
(03:48):
then growth impact as a result of the policies which
were being discussed, you know, on the campaign trail. So
all in all, the tariff rate which I talked about
is 60% in China, 10 to 20% on the rest
of the world, depending on which speech you pick up.
But these are significant numbers. And on fiscal policy, given
that we have a red sweep, that means tax cuts
(04:09):
can happen. The extension of tcja can happen. You know,
there is no talk of fiscal pragmatism in any of
the campaigns, both campaigns, Democrat or Republicans. But in a
red sweep scenario, you know, fiscal deficit in the US
can go above 8%, which is very significant obviously, compared
to pre pandemic period, but also very abnormal when you
(04:34):
look at years outside of of recessions.
S1 (04:38):
So if we think about the tariffs because that has
been a point that has been discussed extensively, it's sort
of interesting because if you think about the first Trump presidency,
we obviously saw some tariffs coming in over the Biden presidency.
It's fair to say that that policy has been continued
somewhat so with the policy, and Trump has been very
(04:59):
vocal around putting tariffs on things if that was to occur.
And I guess we went to that maximum position that
Trump's been talking about on tariffs, those higher tariffs, what
are then the possible implications for the broader economy. Because
we know over the last couple of years we've been
battling inflation. Central banks have been obviously trying to get
(05:19):
a handle of that. What do higher tariffs if we
do see them mean for that aspect of the economy.
S2 (05:27):
Sure. So our assessment is that if tariffs are done
as they are, you know, being discussed, although there is
a discussion to have whether, you know, how will tariffs
be put in place. I think that's an important discussion
to have as well. But let's assume that to your
question is that, you know, tariffs are done 60% on
(05:47):
China and 10% on the rest of the world. So
our assessment is that gives one off shock to core
inflation of 300 basis points. For US core inflation shock
is up to 300 basis points. Now that's a one
off shock. But that can become a sustained shock depending
on how it shocks inflation expectations or tariffs. Permanent. Are
(06:11):
they a part of negotiation you know or broader negotiation strategy.
And then how does the fed react to it. Which
is also important because a potential deterioration in the relationship
between a Trump presidency and administration and fed, you know,
will have consequences both on inflation expectations and potential real
(06:31):
rates as well. So it's a significant change. And just
to give you perspective, China tariff rates pre 2017, 2018
were around one and a half, 2%. Uh they went
to 1,010%. But now you're talking about bringing 10 to 60.
So this this is not about tariffs. It's also about
the rate which is yeah being being discussed. And these
(06:52):
are significant rates. So as I said, I think we
see 300 basis points as an upper ceiling estimate. And
then we think about okay, you know, what are the
scenarios how they're going to get placed. Are they going
to be done incrementally or are they permanent. Are they
you know, are they part of a you know, as
I said, broader negotiation strategy than the shock is, you know,
can transmit itself differently to like, you know, one of
(07:16):
the big, uh, 300 basis point shock.
S1 (07:19):
Uh huh. And if you think about, I guess you
mentioned China, and we saw China undertake a pretty significant
stimulus in September. The initial market reaction was positive. However,
some of that excitement around that stimulus has fizzled out. Now,
the market has been really sort of waiting now and saying, well,
(07:39):
what's fiscal stimulus going to look like in China? Do
you think that the changes in the US government, the
possibility of high tariffs on China, do you think that
is going to have any implication as to China's next
move in terms of things like fiscal stimulus.
S2 (07:58):
I mean, it may impact the timing to be fair
with you. Even without tariffs, China needs a stimulus. And
we saw the pivot in September start to take place.
And it came on the back of a run of
weak data, especially credit data. So credit demand has been
missing in China. And that is, you know, a very
broad based worrying sign. You know, linked with the lack
(08:20):
of domestic demand. And then that plays into employment. So
I think yes, there are implications. So we have the
MPC tomorrow which I think goes will, you know, give
us more detail and discussion. But please remember that China
will need stimulus for many, many quarters ahead. This is
not a one off quarter thing. I think they will
have to think about how they calibrate the numbers, how
(08:40):
they manage expectations, because the economy will need support for
many quarters to come as this balance sheet issue gets resolved.
A stopgap stimulus is what worries the market? And rightly so.
And that's, you know, that can undo the progress quite
quickly if it's stopgap. So the tariff risks complicate the picture.
But I don't think they are the primary driver. They
(09:00):
are basically they, you know, amplify the need for a
thought out fiscal rather than, you know, triggering a fiscal
if you. Yeah.
S1 (09:09):
No. Absolutely. And if we think about outside of China
and I know from an Australian perspective, there's been a
lot of early discussion around what does it all mean
for Australia in terms of from a trade perspective. Any
views from yourself around more broadly beyond China? You know, many,
many governments will be reassessing how they what it means,
(09:29):
how do they deal with this new presidency and the
different policies? What are the possible implications beyond China in
terms of trade, this sort of potentially more protectionist type
of attitude? What does that mean?
S2 (09:43):
Sure. So I think obviously in Asia Pacific, part of
the world, obviously the focus is on China, as you
rightly pointed out, Luke is. But I think it's also Europe.
It's Europe is not you know, Europe is the second.
In fact, I would say more exposed to all this
than right, because Europe, like China, is an open economy.
They are, you know, they are export focused as well.
(10:04):
Both of them have current account surpluses. With the US now,
rightly and wrongly, Trump administration or Trump thinking, Trump overall
thinking is that, you know, current account deficits are bad.
You can argue, you know, the mechanics of that argument,
but Europe is the other one. And another angle where
Europe gets exposed is geopolitics. So you have two conflicts
(10:26):
as well running Ukraine, Russia and then obviously in the
Middle East as well on Ukraine and Russia, some of
the views of Trump campaign have been very much more
clearer than they have been on the Middle East conflict,
which is more complicated and complex as well, given you
have multiple stakeholders involved. So I think there is a
security angle there. Obviously, the tariff angle from the economic
(10:48):
policy perspective, and then the more medium term structural angle that,
you know, the idea that the first Trump presidency was
one of has been destroyed, right. So is it, you know,
sort of a more structural trend of protectionism. It has
to be also be thought out because the responses will
be different, right? If yes, if you think these are
(11:09):
these issues are here to stay. And as you mentioned earlier,
the Biden administration put, you know, when it came in
in 2020, did not undo the tariffs. They didn't they
maintained them right. So that also gives a signal value that,
you know, whatever changes happen may have staying power.
S1 (11:26):
Yeah, absolutely. And then from a market perspective it's interesting
because obviously a lot of the focus has been on the,
you know, what are the possible implications of the macro
economics and so forth. But if you think about the
markets just after the elections, we saw the US market
rally quite hard. If we look at previous elections, that
tends to be a common early phenomenon where I guess
(11:47):
markets like clarity, they like certainty. I mean, this time
around it was pretty clear cut. The result came through
pretty quickly. But further afield, how do you think from
a market perspective, this presidency will impact markets, if at all?
S2 (12:03):
Sure. So I think we have to look at the
rates market very, very carefully because I think they will
be very sensitive to any fiscal deployment, the nature of it,
the size of it. I think it will take months
and months before it gets, you know, you get the
clarity because the administration doesn't get, you know, get into
the white House and Congress is not sworn in until
Jan of 2025. So we will have to go with
(12:25):
the expectations, you know, and the immediate next step is
who's going to be in cabinet, Treasury secretary, the key
appointments I think they are going to be they're going
to take a lot of focus. And I think the
pressure on rates is likely to be on the up side.
Dollar does well I think in this environment because of
tariff risks. And again you can argue the form and
shape of the tariffs, and we'll have a lot to
(12:47):
say about it, I think, going forward. But dollar does
seem to be the clearest barometer of that, that trend
and then equities. Equities are interesting in the sense they
rally no matter what. So they have they have been
in that, uh, you know, phase because there have been
other multiple things happening as well beyond presidential elections as
(13:08):
you know. Yeah. So I think there we have to
be thinking about the sectoral implications, you know, which sectors
may benefit from deregulation. You've seen financials do very well.
And I think that trend can continue. Rate sensitive sectors
may come under pressure on a relative basis. But overall
you are looking at you know nominal GDP upswing here right.
And I think if you look beyond the first stage
(13:31):
of it, the second stage is you know, how the
fed reacts to a nominal growth going to 7%, right. Yeah.
You know, growth going from already US growth was around 3%
real growth right. It can easily go to four. And
then inflation can go back above three. So you're talking
about 7% plus normal growth. So the question is you
know can the fed cut when normal growth is running
(13:52):
at 7%. Do we have to think about hikes again
maybe a bit early to think about it. But you
know those are the stage two questions in 2025. And
then equities may not like it. But you know right
now we are in stage one which is reflation or
what I call Trump inflation which is basically policy driven reflation.
This is not a natural cyclical phenomenon. This is potentially
(14:15):
being using the policy to pull everything up and also
do some transfer of growth through tariffs. Right. You basically
transfer growth back to the US from Europe and China.
S1 (14:26):
Fantastic. And if we think about the broader macroeconomic environment,
and one of the things that I know you and
your team look at quite closely is looking at what
is the future environment maybe look like. And you do
have a couple of scenarios that you look at. And
one of those that has been quite prominent is this
(14:46):
concept of a soft landing scenario. Yeah. Yeah. And that
has been, I guess, Fidelitys most probable scenario for the
last little while. How do you think from, you know,
if you think about that scenario, what are the risks
to that soft landing scenario potentially going forward with this
(15:06):
new presidency coming in?
S2 (15:09):
So I think the clear risk is upside risk. I
think during summer we were, you know, playing with the
the recession soft landing, you know, spectrum. And we we
held on to our soft landing view mainly on the
flow of the data on consumption patterns. We are seeing
labor market was slowing, but it was not falling off
(15:30):
the cliff. Obviously, there was a lot of reaction on
the basis of nonfarm payrolls, monthly nonfarm payrolls release, but
they tend to be very volatile and subject to revisions. So,
you know, you are basically forecasting a data with errors
and you don't know about these errors until like six
months or a year later. And these errors are significant. So,
(15:51):
you know, the last benchmark revisions were up to a
million jobs. So so you know, but the fed has
been focused on it because they said, oh, we are
data dependent but you are dependent on faulty data. So
we were looking at a holistic range of labor market data.
And it gave us the signal that, you know, there
is it's slowing, but it's not falling off the cliff.
And in level terms, it's still a very strong labor
(16:12):
market in level terms. So we stuck to our soft
landing view as it was tested during the summer. But
now as we are moving towards, you know, 2025, obviously
we have to think about the impact of these economic policies.
We will have to make a judgement on, you know,
at least what the base case would look like. But here,
I think it's pretty clear the direction of travel is is,
as I mentioned, nominal GDP upswing, which means that, you know,
(16:36):
you have to think about inflation scenario, which is mixture
of reflation and the critical question of how the fed
responds to that. Once as it starts to get, you know,
bedded in, it's too early for them to comment on
it or think about it. But obviously a fiscal policy
stimulus which takes your deficit from 6 to 8 is
(16:57):
a very significant one. And tariff rates, as I mentioned,
you know, are not incremental increases, right? So I think
we are basically as we think about 25, we will
be punching up probabilities of what you can, what looks
like reflation, what has policy centricity around it. And I
think to my mind a recession in the US now
(17:18):
happens if the fed responds to all this right. Yeah. Right.
So it's a different sequence now compared to I think
if we had a Harris administration, for example.
S1 (17:30):
And maybe on a final point, I guess, you know,
there's a lot of moving parts. Obviously there's geopolitics, there's
change in presidencies. There's, you know, things that have been
impacting markets for some time, such as, you know, inflation.
Where are you the most optimistic if you think about
the next 12 months, over the next, you know, 2025?
What areas are you the most optimistic about?
S2 (17:53):
So I think the areas I like are like, you know,
equity markets still, I think can, you know, because they
are not only nominal asset classes, they are also real
asset classes in some ways. So I think obviously there
will be sectoral implications of what we are discussing. And
we can go into the, you know, the more details
of that. So as I said, financials, defense stocks you know,
(18:16):
can benefit. And then you have obviously you have all.
But you have to then navigate this with geopolitics retaliation risks.
And at some point a fed you know which becomes
more aggressive. So that's the navigation pathway. But it's going
to be more volatile I know volatility has been very
low going into this election which makes sense right. People
(18:37):
don't want to take a view The polls were suggesting
a very close race. So, you know, so you could
see like at the market level realized wall has been
coming down. So bond market volatility is back. I think
that will remain the case because we're going to have
a lot of expectation based moves right now till till
the administration comes in and, you know, starts putting things
(18:59):
into play into motion. I think that rate volatility affecting
equity volatility has to be watched as well. So overall
you know we are still risk on with a different
lens on it. Uh compared to you know compared to
a couple of months ago.
S1 (19:15):
Well Salman, thank you very much for your insights. Very
timely and certainly great to sort of explore the various
possible scenarios. But I think, you know, one of the
interesting things is that markets seem to be continue chugging along.
So we'll see what happens. And all the best for
the cricket as well. So we'll see what happens. Thank
you very much.
S2 (19:33):
At least please give us one game.
S3 (19:35):
Please. Thank you.
S2 (19:38):
My brother is Australian, so? So I've been, you know,
telling him.
S3 (19:42):
That.
S2 (19:43):
England comes in. We need to have a proper banter.
S3 (19:46):
Absolutely.
S2 (19:47):
Absolutely perfect. Thank you very much, Lucas.
S1 (19:50):
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S4 (20:04):
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(20:28):
Australia products available at fidelity.Com.au.
Hello and welcome to Sound Bites. Fidelity's monthly podcast where
we talk about all things investments. My name is Lucas
de Pourbaix and I'm from Fidelity International, and I'm pleased
to be joined this month by Fidelity's global head of
macro and strategic asset allocation, Salman Ahmed. Salman has over
25 years of investing experience, holds a PhD and Master
of Philosophy in Economics and Finance from Cambridge. His role
(00:29):
at fidelity sees him and his team oversee our broader
global macroeconomic inputs that feed into our various investment teams,
as well as our strategic asset allocation process. We're excited
to have someone of Salman's caliber on the show. Welcome, Salman.
S2 (00:44):
Thank you. Thank you for having me.
S1 (00:46):
And before we get into the nitty gritty and today's discussion,
not surprisingly, is really going to be focused on the
the big event everyone's talking about. And that is the
US election. But before we get into that, I'm always
interested in in the people that I speak to. And
one of the things I know you're very passionate about
is cricket. And from what I understand, uh, Australia is
(01:06):
playing Pakistan tomorrow in Sydney, I believe. So tell us
about your passion for cricket.
S2 (01:14):
Oh, definitely. I mean, to be fair with you, I
have a lot of respect for the Australian team. I
wish my team could learn a thing or two from
from the Aussies, but. Yeah, I mean, but Pakistan is Pakistan,
so I don't know if you followed the series against England.
We beat them for you guys. So you can, uh,
you can then uh, go into ashes with a different perspective.
But yeah, it's still every team's dream to beat Australia
(01:37):
and Australia. And I hope it will happen in my lifetime.
S1 (01:39):
Yeah, well, we'll see what happens. And yeah, good luck
to both teams, I guess. But let's kick off the
podcast because, you know, if we sort of start off
with things and it's been an interesting couple of days,
there's been a lot of speculation, you know, who's going
to win. The pollsters were saying it's going to be
a very tight race. Now it's actually ended up being
a resounding win for the Republicans, winning the popular vote.
(02:00):
The Senate and I believe they've also won the House
as well. So pretty much full control and a pretty
broad mandate in terms of their policy agenda. And I
guess in terms of the policy agenda, what are some
of the key things that you believe we should be
watching and observing in terms of policy, particularly from a
macroeconomic perspective?
S2 (02:21):
Sure. No, definitely. I think as you as you mentioned, Lucas,
I think the final results are that President Trump is
outperformed the polls by 2 or 3 percentage points across
the board. So that's the challenge for the polling industry.
I think they are getting it or his nature of
his support. Wrong now consistently. But that's for the polling
industry to sort out. But the betting markets, to be
(02:42):
fair with you for most period over the last few
weeks have been around plus 60% plus. And then they
had this volatility going to the elections. But you know
on general the tilt had been towards a potential Trump victory.
But also I think one of the scenarios which was
probably underpriced was the red sweep. So which is that,
you know, if President Trump wins, it was very likely
(03:05):
as well that he would carry with him the down ballots.
That said, obviously the Senate election was much more comfortable,
but the House came very, very close. And it's likely
the majority in the House of Republicans may be smaller
than the last time around. So there are some nuances there.
But the reality is that we are looking towards a
red sweep, which is quite different from a divided government
(03:28):
when it comes to fiscal policy. So there are two,
I think, components of macro economic policy we are focused
on and have been focused on for many months now.
We've done a lot of work on, you know, what
happens if tariffs are put in as they are being discussed.
We've also done the work on fiscal deficits impact and
(03:48):
then growth impact as a result of the policies which
were being discussed, you know, on the campaign trail. So
all in all, the tariff rate which I talked about
is 60% in China, 10 to 20% on the rest
of the world, depending on which speech you pick up.
But these are significant numbers. And on fiscal policy, given
that we have a red sweep, that means tax cuts
(04:09):
can happen. The extension of tcja can happen. You know,
there is no talk of fiscal pragmatism in any of
the campaigns, both campaigns, Democrat or Republicans. But in a
red sweep scenario, you know, fiscal deficit in the US
can go above 8%, which is very significant obviously, compared
to pre pandemic period, but also very abnormal when you
(04:34):
look at years outside of of recessions.
S1 (04:38):
So if we think about the tariffs because that has
been a point that has been discussed extensively, it's sort
of interesting because if you think about the first Trump presidency,
we obviously saw some tariffs coming in over the Biden presidency.
It's fair to say that that policy has been continued
somewhat so with the policy, and Trump has been very
(04:59):
vocal around putting tariffs on things if that was to occur.
And I guess we went to that maximum position that
Trump's been talking about on tariffs, those higher tariffs, what
are then the possible implications for the broader economy. Because
we know over the last couple of years we've been
battling inflation. Central banks have been obviously trying to get
(05:19):
a handle of that. What do higher tariffs if we
do see them mean for that aspect of the economy.
S2 (05:27):
Sure. So our assessment is that if tariffs are done
as they are, you know, being discussed, although there is
a discussion to have whether, you know, how will tariffs
be put in place. I think that's an important discussion
to have as well. But let's assume that to your
question is that, you know, tariffs are done 60% on
(05:47):
China and 10% on the rest of the world. So
our assessment is that gives one off shock to core
inflation of 300 basis points. For US core inflation shock
is up to 300 basis points. Now that's a one
off shock. But that can become a sustained shock depending
on how it shocks inflation expectations or tariffs. Permanent. Are
(06:11):
they a part of negotiation you know or broader negotiation strategy.
And then how does the fed react to it. Which
is also important because a potential deterioration in the relationship
between a Trump presidency and administration and fed, you know,
will have consequences both on inflation expectations and potential real
(06:31):
rates as well. So it's a significant change. And just
to give you perspective, China tariff rates pre 2017, 2018
were around one and a half, 2%. Uh they went
to 1,010%. But now you're talking about bringing 10 to 60.
So this this is not about tariffs. It's also about
the rate which is yeah being being discussed. And these
(06:52):
are significant rates. So as I said, I think we
see 300 basis points as an upper ceiling estimate. And
then we think about okay, you know, what are the
scenarios how they're going to get placed. Are they going
to be done incrementally or are they permanent. Are they
you know, are they part of a you know, as
I said, broader negotiation strategy than the shock is, you know,
can transmit itself differently to like, you know, one of
(07:16):
the big, uh, 300 basis point shock.
S1 (07:19):
Uh huh. And if you think about, I guess you
mentioned China, and we saw China undertake a pretty significant
stimulus in September. The initial market reaction was positive. However,
some of that excitement around that stimulus has fizzled out. Now,
the market has been really sort of waiting now and saying, well,
(07:39):
what's fiscal stimulus going to look like in China? Do
you think that the changes in the US government, the
possibility of high tariffs on China, do you think that
is going to have any implication as to China's next
move in terms of things like fiscal stimulus.
S2 (07:58):
I mean, it may impact the timing to be fair
with you. Even without tariffs, China needs a stimulus. And
we saw the pivot in September start to take place.
And it came on the back of a run of
weak data, especially credit data. So credit demand has been
missing in China. And that is, you know, a very
broad based worrying sign. You know, linked with the lack
(08:20):
of domestic demand. And then that plays into employment. So
I think yes, there are implications. So we have the
MPC tomorrow which I think goes will, you know, give
us more detail and discussion. But please remember that China
will need stimulus for many, many quarters ahead. This is
not a one off quarter thing. I think they will
have to think about how they calibrate the numbers, how
(08:40):
they manage expectations, because the economy will need support for
many quarters to come as this balance sheet issue gets resolved.
A stopgap stimulus is what worries the market? And rightly so.
And that's, you know, that can undo the progress quite
quickly if it's stopgap. So the tariff risks complicate the picture.
But I don't think they are the primary driver. They
(09:00):
are basically they, you know, amplify the need for a
thought out fiscal rather than, you know, triggering a fiscal
if you. Yeah.
S1 (09:09):
No. Absolutely. And if we think about outside of China
and I know from an Australian perspective, there's been a
lot of early discussion around what does it all mean
for Australia in terms of from a trade perspective. Any
views from yourself around more broadly beyond China? You know, many,
many governments will be reassessing how they what it means,
(09:29):
how do they deal with this new presidency and the
different policies? What are the possible implications beyond China in
terms of trade, this sort of potentially more protectionist type
of attitude? What does that mean?
S2 (09:43):
Sure. So I think obviously in Asia Pacific, part of
the world, obviously the focus is on China, as you
rightly pointed out, Luke is. But I think it's also Europe.
It's Europe is not you know, Europe is the second.
In fact, I would say more exposed to all this
than right, because Europe, like China, is an open economy.
They are, you know, they are export focused as well.
(10:04):
Both of them have current account surpluses. With the US now,
rightly and wrongly, Trump administration or Trump thinking, Trump overall
thinking is that, you know, current account deficits are bad.
You can argue, you know, the mechanics of that argument,
but Europe is the other one. And another angle where
Europe gets exposed is geopolitics. So you have two conflicts
(10:26):
as well running Ukraine, Russia and then obviously in the
Middle East as well on Ukraine and Russia, some of
the views of Trump campaign have been very much more
clearer than they have been on the Middle East conflict,
which is more complicated and complex as well, given you
have multiple stakeholders involved. So I think there is a
security angle there. Obviously, the tariff angle from the economic
(10:48):
policy perspective, and then the more medium term structural angle that,
you know, the idea that the first Trump presidency was
one of has been destroyed, right. So is it, you know,
sort of a more structural trend of protectionism. It has
to be also be thought out because the responses will
be different, right? If yes, if you think these are
(11:09):
these issues are here to stay. And as you mentioned earlier,
the Biden administration put, you know, when it came in
in 2020, did not undo the tariffs. They didn't they
maintained them right. So that also gives a signal value that,
you know, whatever changes happen may have staying power.
S1 (11:26):
Yeah, absolutely. And then from a market perspective it's interesting
because obviously a lot of the focus has been on the,
you know, what are the possible implications of the macro
economics and so forth. But if you think about the
markets just after the elections, we saw the US market
rally quite hard. If we look at previous elections, that
tends to be a common early phenomenon where I guess
(11:47):
markets like clarity, they like certainty. I mean, this time
around it was pretty clear cut. The result came through
pretty quickly. But further afield, how do you think from
a market perspective, this presidency will impact markets, if at all?
S2 (12:03):
Sure. So I think we have to look at the
rates market very, very carefully because I think they will
be very sensitive to any fiscal deployment, the nature of it,
the size of it. I think it will take months
and months before it gets, you know, you get the
clarity because the administration doesn't get, you know, get into
the white House and Congress is not sworn in until
Jan of 2025. So we will have to go with
(12:25):
the expectations, you know, and the immediate next step is
who's going to be in cabinet, Treasury secretary, the key
appointments I think they are going to be they're going
to take a lot of focus. And I think the
pressure on rates is likely to be on the up side.
Dollar does well I think in this environment because of
tariff risks. And again you can argue the form and
shape of the tariffs, and we'll have a lot to
(12:47):
say about it, I think, going forward. But dollar does
seem to be the clearest barometer of that, that trend
and then equities. Equities are interesting in the sense they
rally no matter what. So they have they have been
in that, uh, you know, phase because there have been
other multiple things happening as well beyond presidential elections as
(13:08):
you know. Yeah. So I think there we have to
be thinking about the sectoral implications, you know, which sectors
may benefit from deregulation. You've seen financials do very well.
And I think that trend can continue. Rate sensitive sectors
may come under pressure on a relative basis. But overall
you are looking at you know nominal GDP upswing here right.
And I think if you look beyond the first stage
(13:31):
of it, the second stage is you know, how the
fed reacts to a nominal growth going to 7%, right. Yeah.
You know, growth going from already US growth was around 3%
real growth right. It can easily go to four. And
then inflation can go back above three. So you're talking
about 7% plus normal growth. So the question is you
know can the fed cut when normal growth is running
(13:52):
at 7%. Do we have to think about hikes again
maybe a bit early to think about it. But you
know those are the stage two questions in 2025. And
then equities may not like it. But you know right
now we are in stage one which is reflation or
what I call Trump inflation which is basically policy driven reflation.
This is not a natural cyclical phenomenon. This is potentially
(14:15):
being using the policy to pull everything up and also
do some transfer of growth through tariffs. Right. You basically
transfer growth back to the US from Europe and China.
S1 (14:26):
Fantastic. And if we think about the broader macroeconomic environment,
and one of the things that I know you and
your team look at quite closely is looking at what
is the future environment maybe look like. And you do
have a couple of scenarios that you look at. And
one of those that has been quite prominent is this
(14:46):
concept of a soft landing scenario. Yeah. Yeah. And that
has been, I guess, Fidelitys most probable scenario for the
last little while. How do you think from, you know,
if you think about that scenario, what are the risks
to that soft landing scenario potentially going forward with this
(15:06):
new presidency coming in?
S2 (15:09):
So I think the clear risk is upside risk. I
think during summer we were, you know, playing with the
the recession soft landing, you know, spectrum. And we we
held on to our soft landing view mainly on the
flow of the data on consumption patterns. We are seeing
labor market was slowing, but it was not falling off
(15:30):
the cliff. Obviously, there was a lot of reaction on
the basis of nonfarm payrolls, monthly nonfarm payrolls release, but
they tend to be very volatile and subject to revisions. So,
you know, you are basically forecasting a data with errors
and you don't know about these errors until like six
months or a year later. And these errors are significant. So,
(15:51):
you know, the last benchmark revisions were up to a
million jobs. So so you know, but the fed has
been focused on it because they said, oh, we are
data dependent but you are dependent on faulty data. So
we were looking at a holistic range of labor market data.
And it gave us the signal that, you know, there
is it's slowing, but it's not falling off the cliff.
And in level terms, it's still a very strong labor
(16:12):
market in level terms. So we stuck to our soft
landing view as it was tested during the summer. But
now as we are moving towards, you know, 2025, obviously
we have to think about the impact of these economic policies.
We will have to make a judgement on, you know,
at least what the base case would look like. But here,
I think it's pretty clear the direction of travel is is,
as I mentioned, nominal GDP upswing, which means that, you know,
(16:36):
you have to think about inflation scenario, which is mixture
of reflation and the critical question of how the fed
responds to that. Once as it starts to get, you know,
bedded in, it's too early for them to comment on
it or think about it. But obviously a fiscal policy
stimulus which takes your deficit from 6 to 8 is
(16:57):
a very significant one. And tariff rates, as I mentioned,
you know, are not incremental increases, right? So I think
we are basically as we think about 25, we will
be punching up probabilities of what you can, what looks
like reflation, what has policy centricity around it. And I
think to my mind a recession in the US now
(17:18):
happens if the fed responds to all this right. Yeah. Right.
So it's a different sequence now compared to I think
if we had a Harris administration, for example.
S1 (17:30):
And maybe on a final point, I guess, you know,
there's a lot of moving parts. Obviously there's geopolitics, there's
change in presidencies. There's, you know, things that have been
impacting markets for some time, such as, you know, inflation.
Where are you the most optimistic if you think about
the next 12 months, over the next, you know, 2025?
What areas are you the most optimistic about?
S2 (17:53):
So I think the areas I like are like, you know,
equity markets still, I think can, you know, because they
are not only nominal asset classes, they are also real
asset classes in some ways. So I think obviously there
will be sectoral implications of what we are discussing. And
we can go into the, you know, the more details
of that. So as I said, financials, defense stocks you know,
(18:16):
can benefit. And then you have obviously you have all.
But you have to then navigate this with geopolitics retaliation risks.
And at some point a fed you know which becomes
more aggressive. So that's the navigation pathway. But it's going
to be more volatile I know volatility has been very
low going into this election which makes sense right. People
(18:37):
don't want to take a view The polls were suggesting
a very close race. So, you know, so you could
see like at the market level realized wall has been
coming down. So bond market volatility is back. I think
that will remain the case because we're going to have
a lot of expectation based moves right now till till
the administration comes in and, you know, starts putting things
(18:59):
into play into motion. I think that rate volatility affecting
equity volatility has to be watched as well. So overall
you know we are still risk on with a different
lens on it. Uh compared to you know compared to
a couple of months ago.
S1 (19:15):
Well Salman, thank you very much for your insights. Very
timely and certainly great to sort of explore the various
possible scenarios. But I think, you know, one of the
interesting things is that markets seem to be continue chugging along.
So we'll see what happens. And all the best for
the cricket as well. So we'll see what happens. Thank
you very much.
S2 (19:33):
At least please give us one game.
S3 (19:35):
Please. Thank you.
S2 (19:38):
My brother is Australian, so? So I've been, you know,
telling him.
S3 (19:42):
That.
S2 (19:43):
England comes in. We need to have a proper banter.
S3 (19:46):
Absolutely.
S2 (19:47):
Absolutely perfect. Thank you very much, Lucas.
S1 (19:50):
Thank you for joining us in this month's podcast. If
you'd like to subscribe, please reference your favorite podcast platform
or if you'd like to provide us feedback, please email
us at PodcastsAustralia@fil.com
S4 (20:04):
This podcast is issued by Responsible Entity Australia Limited Afsl
number 409340. This podcast is intended as general information only
and has been prepared without taking into account any persons objectives,
financial situation or needs. Please note that past performance is
not a reliable indicator of future performance. You should consider
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(20:28):
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