In fact, the United States will have growth above 2.5%, which, in nominal terms, will be 5%. “This means that the reduction in interest rates in the United States will only be one time, compared to the three initially planned. One of the risks that weigh on the Central Banks is that inflation will skyrocket to levels that will make them change their discourse, but today they will continue their downward path in rates and even the FED can lower interest rates with full employment. «, says Fernando Fernández-Bravo, head of asset sales for Iberia at Invesco. Furthermore, “If Trump deregulates the economy and maintains lax fiscal policy, it is expected that the economy will grow more and the FED will not need to lower interest rates further.”
As to Inflation will be 3% in the United States, which will suggest interest rates of 3.5%, while in Europe interest rates will be 2%. with an inflation of 2%. However, on the old continent, Germany and France are having problems at a time when their growth model is suffering. China, both for industrial production and for batteries, is one of the largest producers and that hurts it, causing it to Germany is no longer as efficient as it was in the past. “The ECB will be favored by lowering interest rates, there is no inflation problem and this in a situation in which the southern countries are the ones that are growing the most. Regarding the rest of the developed countries, there will be measures to boost the growth of the United Kingdom while Japan is in another moment that can lead to greater growth and China is monitoring what Trump does, says Fernández Bravo.
An expert who talks abouts three axes on which Trump’s policy will be based: 1) deregulation, although the United States is one of the most deregulated economies and we do not believe that the situation will change much. 2) Tariffs, which may affect Mexico, China and Canada and 3) deportations. Trump has spoken of 10 million people deported but we believe that it will be difficult to deport more than a million people because 25% of the vegetable production in the United States is in the California Valley and a large part of the workers could be reported, which which would harm the production chain and, therefore, inflation.
Finally, China wants to grow by 5% and wants to improve the corporate governance of companies that results in an improvement in EPS so that companies are more transparent. “In the country, most of the savings have gone to real estate but since the 2011 bubble the sentiment about investing was very negative. We believe that is going to change, inflation is going down and in some way companies and the stock market will improve.”
Therefore, Invesco’s base case is based on there will be lower growth in the first quarters and then accelerate it with a FED that will remain neutral while other central banks continue their path to lower interest rates.
As for the markets, knowing that rate cuts are good for risk assets, “we like variable income and fixed income, taking advantage of drops in interest rates to take on duration risk by going more on credit,” says the Invesco expert. For its part, Laure Peyranne, ETF director for Iberia, Latam and US Offshore He believes that “in emerging markets there will be a global cycle of rate cuts, especially in Asia. In this sense, we are optimistic about investment grade credit because, although the fundamentals are good in high yield, the spreads are very compressed. In emerging markets we are neutral because we already have tight valuations and we would recommend entering into corrections.”
This expert assures that we are in a positive environment for risk assets but with the uncertainty of what Trump will do. “In Equities we are positive but we believe that the American market has been pushed by the Magnificent 7, which in turn were driven by Covid and by everything that AI represents, but at the valuation level we are concerned and in ETFs we see more and more flows into S&P 500 Equal Weight to correct the concentration of the index. we are seeing currently a 30% premium in S&P 500 companies compared to Equal Weight when historically they have had similar growth”.
Besidesinterest rate cuts should raise the yield curve which favors value and smaller capitalization companies. “With the drop in interest rates, financing costs are lower and the probability of corporate operations increases. We believe that in American small caps there is more value due to a valuation issue,” they say at Invesco.
In raw materials they recognize that they like gold because of the effect of the drop in interest rates and because there may be risk.
In the dollar, although it is true that in real terms it is at the most expensive level in the last 40 years – the trade has been to buy dollars to buy the American stock market – there is a lot of investment, and it could turn around and the path of the dollar can weaken. The Invesco expert recognizes that “Trump’s speech points to a strong dollar although there may be volatility.”