Equities rally ahead of US election as fiscal pressures mount

As 2024 draws to a close, and many of us are wrapping up plans for Christmas and the upcoming festivities, it’s also probably a good time to have a look at finances including investments. While short-term government bonds, have held steady to meet liquidity needs, investors in balanced portfolios of risk assets, whether through direct investments or unit-linked pensions, have been rewarded.

For local investors, fixed-income securities continue to attract attention. Beyond foreign high-yield bonds, the local market shows a clear home bias, with strong participation in new government and corporate bond issuances. Retail investors applications for Malta Government Stocks ranged from €90 million (m) to €108m across the three auctions in February, July and October as the total issuance surpassed €1 billion.

Local corporate bonds were similarly in high demand, with issuances from Phoenicia Finance, Hili Finance, and Hal Mann Vella Group all oversubscribed. Bank of Valletta (BOV) p.l.c. capped the year with its €100m five per cent subordinated bond (2029-2034), Malta’s largest ever, which closed on launch day. BOV CEO Kenneth Farrugia remarked, that “this achievement marks yet another milestone for BOV and highlights the confidence that both investors and the public have in this bank.”

At the start of the year, dynamic macro forces made cash deployment challenging, with the relative stability of US sovereigns (five per cent) and EU bonds (three per cent) drawing in many investors. While “T-Bill and Chill” is safe for parking liquidity, it’s not an adequate investment strategy. This is especially true as markets tend to be forward-looking but unforgiving when it comes to timing. Long-term investors that took the opportunity to implement a balanced investment strategy and build up resilient core portfolios have been rewarded as the S&P 500 with over 40 all-time highs, delivered 22 per cent so far and could see further gains as central banks ease rates.

That said, total money market fund assets have risen to €5.53 trillion ($6.51 trillion), showing investor caution as many await further central bank guidance and US election results. Post-election, flows into risk assets could drive a momentum trade into year-end.

While betting markets and polls lean in favour of Trump, the race remains tight as swing states sit within the margin of error. Markets, however, have started pricing in the potential of a Trump victory.

A major shift in positioning could emerge if Republicans or Democrats win both the House and Senate, enabling a unified government with a greater ability to enact policy. Both candidates have promised increased spending, with Trump’s plan including corporate tax cuts expected to be especially aggressive.

At the annual International Monetary Fund meeting in Washington DC last week, fiscal discipline was central as global public debt is expected to exceed €85 trillion ($100 trillion – 93 per cent of global Gross Domestic Product) by year-end. With no fiscal tightening expected imminently, yields may be pressured higher.

After the Federal Reserve declared victory over inflation with a 50-basis point cut in September, interest rates have gone higher on continued economic strength. While Powell’s Fed is no stranger to policy missteps, this is largely due to the increased odds of a Trump win and low investor demand in recent auctions.

Recent market positioning shows reduced recession fears as markets bet on continued growth and persistent inflation—a “no landing” scenario. This aligns with JPMorgan CEO Jamie Dimon’s view that “the American economy is still booming,” and BlackRock’s Larry Fink, who predicts high rates to continue, citing a long history of trillion-dollar deficits. Inflation, both suggest, is likely to persist.

Especially appealing is billionaire hedge fund manager Paul Tudor Jones’s view that all signs point toward inflation. The best path forward may indeed be inflating the debt away, requiring the most accommodative monetary stance possible while avoiding inflation taxing citizens too much. A strategic focus on growth equities, cash equivalents, and alternatives like gold, bitcoin, and the vastly under-owned commodities can offer investors resilience against inflation while tapping into economic momentum. For added balance, incorporating longer-duration European fixed income could help address recession concerns and enhance portfolio stability.

The author and the company have obtained the information contained in this article from sources they believe to be reliable, but they have not independently verified the information contained herein and therefore its accuracy cannot be guaranteed.

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