Market Overview
Global equity markets rose in November, as investors grappled with the ramifications of Donald Trump’s decisive victory in the U.S. presidential election.
News of Trump’s stunning political comeback was greeted by mixed reactions from markets around the world. In the U.S., the stock market rose sharply on optimism that the agenda for a second Trump presidential term would include business-friendly policies such as lower corporate taxes and looser regulations that would boost company profits. The market rally slowed in subsequent weeks, however, as investors began to worry that Trump’s policies could also overheat the domestic economy and reignite upward price pressure, potentially forcing the Federal Reserve (Fed) to scale back its rate-cutting plans. As expected, the Fed lowered interest rates for the second time this year in November with a 25 basis point (bps) cut. While the U.S. central bank emphasized that the domestic economy remained strong overall and that inflation had slowed substantially, it reiterated that all future decisions regarding monetary policy would continue to be data-driven and that it was too early to predict how the U.S. economy may evolve in the wake of the results of the presidential election. The yield on the benchmark 10-year U.S. Treasury note ended November at 4.18%,11 bps lower than a month earlier.
Across the Atlantic, European stock markets reacted negatively to news of Trump’s imminent return to power. Investors fretted about the geopolitical risk stemming from another unpredictable Trump presidency that could undermine Ukraine in its war with Russia, as well as the North Atlantic Treaty Organization (NATO) and the overall security of the Continent. Markets were especially fearful that once back in office, Trump will carry out his threat of levying higher tariffs on Europe, which could exacerbate economic weakness in the eurozone. Amid signs of a sustainable slowdown in eurozone inflation, investors expect the European Central Bank (ECB), which has already cut interest rates three times this year, do so again in December with a 25 bps reduction and to continue to reduce borrowing costs at every policy meeting until at least June of next year to prevent the common currency bloc’s economy from tipping into a painful recession. Elsewhere in Europe, the Bank of England (BOE) lowered interest rates for the second time this year with a 25 bps cut in November. While inflationary pressure continued to ease in the U.K., the BOE raised its forecast for inflation due to the governing Labour Party’s fiscal plans, thereby muddling the outlook for further monetary easing. At the same time, however, the British central bank stated that possible trade tariffs levied by the incoming Trump administration posed a risk to the UK’s economic growth. In November, the yield on the 10-year German Bund, Europe’s principal safe-haven asset, fell 30 bps, ending the month at 2.09%.
With the new earnings season in full swing, investors were given the latest update on how company profits have been impacted by the shifting global monetary landscape. In the U.S., 75% of the companies in the S&P 500 Index that reported results topped consensus estimates, which was above the long-term average of 67%. The third-quarter earnings growth rate is estimated to have increased 5.8% from a year earlier. In Europe, 51% of the companies in the STOXX 600 Index that reported results posted better than-expected earnings, below the 54% that do so in a typical quarter. The year-over-year third-quarter earnings growth rate is expected to have contracted 4.2%. In Japan, 43% of the companies in the TOPIX reported positive earnings surprises, which lagged the 58% beat rate over the past four quarters. The third-quarter earnings growth rate is estimated to have increased 7.5% from a year earlier. In Hong Kong, 46% of the companies in the Hang Seng Index registered better-than-expected earnings, underperforming the 49% beat rate over the past four quarters. The third-quarter earnings growth rate increased 13.4% from a year earlier.
Against this backdrop, equity markets in the developed world gained while those in the developing world fell in November. In the U.S., the S&P 500 ended the month at a new all-time high, as investors were optimistic that the incoming Trump administration will deliver business-friendly fiscal policies. In Europe, the STOXX 600 recorded its worst November performance since 2021, as expectations that the ECB will deliver a rate-cut in December were offset by fears about the downside risks posed by a Trump presidency. In Japan, the TOPIX recorded a modest gain despite expectations that the Bank of Japan will raise interest rates at its next policy meeting in December. Meanwhile, in China, the Hong Kong-based Hang Seng Index fell, as investors feared that a Trump presidency could impose higher tariffs on China and curb the country’s access to technology. During the month, President-elect Trump threatened to levy an additional 10% tariff on Chinese imports.
Materials was the worst-performing sector in November, as shares of gold miners declined in sympathy with the fall in the price of the precious metal. Traders worried that higher tariffs under a Trump administration would reignite U.S. inflation that, in turn, could force the Fed to slow its rate-cutting cycle, which would hurt the price of gold. Consumer discretionary was the best performing sector, as a resilient U.S. economy and lower borrowing costs from a dovish Fed boosted interest-rate-sensitive sectors.
Outlook
The long-awaited start to the U.S. Fed rate cutting cycle is now underway. Following a brief initial positive reaction in September, stronger than anticipated economic data and U.S. Presidential election uncertainty led to a substantial increase in U.S. long bond yields which weighed on interest-sensitive securities in following months. Along with financial markets, we await incremental datapoints to affirm or dispute continuation of the trend in easing inflation and resilient growth in GDP and employment.
Utilities have been a key positive contributor to performance this year, albeit this has been heavily concentrated in the U.S. While we maintain a favourable sector outlook for Utilities and foresee scope for upward earnings revision, valuations have also re-rated higher, and we do not expect the same pace of returns for utilities to continue in the U.S. On the other hand, we continue to find very compelling valuations and opportunities in utilities outside the U.S.
Outside of the utilities sector, midstream energy, namely oil & gas storage and transportation, looks to have mostly shrugged off the downward pressure from oil & gas commodity prices as the earnings outlook remains favourable and valuations look compelling. The vast majority of the cash flows associated with the portfolio’s holdings are fee-based and enjoy strong support from the volume of energy molecules transported as well as favourable spread differentials at key access points.
Elsewhere within the portfolio, we see an abundance of opportunities stemming from large-scale investment in transportation infrastructure and renewable energy development, leading to increased demand for materials, capital goods and industrial equipment. We believe the portfolio remains well-positioned to take advantage of these opportunities in real asset infrastructure businesses as well as key enablers, including materials, services, and technologies, that will both facilitate and benefit from increased investment in infrastructure.
We believe publicly-listed infrastructure remains well-positioned to benefit from a continued brisk pace of investment, with plenty of runway ahead, and an end to the rate-hiking cycle, as eventually lower interest rates are used to discount cash flows that have been adjusted higher either for regulatory or contractual inflation-adjustment, or the indirect benefit of inflation adjustment that tends to stem from owning and operating high fixed cost, long life assets.
The information contained herein provides general information about the Fund at a point in time. Investors are strongly encouraged to consult with a financial advisor and review the Simplified Prospectus and Fund Facts documents carefully prior to making investment decisions about the Fund. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Mutual funds are not guaranteed; their values change frequently and past performance may not be repeated.
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Allocations and security selection are subject to change. The performance quoted represents past performance. Past performance is not a reliable indicator of future results. Mention of these securities should not be considered a recommendation or solicitation to purchase or sell the securities. It should not be assumed that any investment in these securities was, or will prove to be, profitable, or that the investment decisions we make in the future will be profitable or equal to the investment performance of securities referenced herein. There is no assurance that any securities referenced herein are currently held in the portfolio or that securities sold have not been repurchased. The securities mentioned may not represent the entire portfolio.
Equity securities will fluctuate in price; the value of your investment will thus fluctuate, and this may result in a loss. Securities in certain non-domestic countries may be less liquid, more volatile, and less subject to governmental supervision than in one’s home market. The values of these securities may be affected by changes in currency rates, application of a country’s specific tax laws, changes in government administration, and economic and monetary policy. Emerging markets securities carry special risks, such as less developed or less efficient trading markets, a lack of company information, and differing auditing and legal standards. The securities markets of emerging markets countries can be extremely volatile; performance can also be influenced by political, social, and economic factors affecting companies in these countries.
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Published on December 16, 2024.