The election of Donald Trump as president for a second term dominated market sentiment in Q4 as investors focused on his promised policy package and its implications for different asset classes. The EAFE index fell 0.62% in local currency terms and 8.11% in US dollars. Financials was the strongest sector as bond yields rose and expectations grew that a Trump administration means less regulation for banks, at least in the US. Materials was the weakest as continued softness in the Chinese economy weighed on metal prices such as copper.
The second Trump administration promises to raise tariffs, curb immigration, reduce regulation and cut taxes increasing the fiscal deficit. The net effect on potential economic growth will likely be neutral/negative with more inflationary pressure, though not before 2026. The positive response of equites is, therefore, questionable and recent relative moves may not be sustained: it is worth noting that similar ‘Trump trades’ spanning the 2016 election (value/cyclical outperformance, EM underperformance, stronger US dollar) reversed from December of that year. Meanwhile the monetary data continues to suggest weak global growth in H1 2025 with favourable inflation news and softer labour market data expected to support faster policy easing.
In the Eurozone money trends are still weak but improving relative to Japan and the UK. Earnings are no longer being cushioned by pricing power and the ECB continues to lower interest rates with two 25 basis point cuts last quarter. Politics has again dominated the news with both the French and German parliaments passing votes of no confidence triggering a change in prime minister in the former and an election on February 23rd in the latter. In the UK, GDP data confirms that the economy had stalled before the end-October Budget, raising further doubts about the MPC’s laggard ‘gradualist’ approach to rate-cutting.
In Japan, the domestic economy isn’t strong enough for significant rate rises and the Bank of Japan held policy at their December meeting putting more downward pressure on the Yen. In the October general election, the ruling LDP lost ground to the opposition after a slush fund corruption scandal but retained power as the largest party in the Diet, with Shigeru Ishiba re-elected as prime minister of a minority government. Elsewhere in Asia there has been a mild improvement in Chinese data with investors pinning their hopes on a further significant fiscal boost, which could be announced after the scale of Trump’s tariffs become clear.
Sector and stock selection were negative over the period with underperformance in Europe but a positive contribution in Japan. The underweight in financials was negative as global bond yields rose in response to the perception that tariffs introduced by Trump’s administration will be inflationary and tax cuts will increase the fiscal deficit. Performance was weak within the sector as BNP (-5%) underperformed other banks, reflecting political turmoil in France raising the risk premium on French assets, while In Australia investment bank Macquarie Group (-8%) fell with other Australian banks as the economy slowed. NatWest (+16%) performed better in the UK after an encouraging set of numbers with management upgrading their return on tangible equity target to over 15%. In insurance AIA (-14%) was weaker after a strong Q3 as optimism triggered by Chinese policy changes faded while Hannover Re (-7%) fell as profits were slightly lower than expected on the back of weaker investment performance.
Elsewhere interest rate-sensitive Spanish telecom tower operator Cellnex (-17%) was also hit by rising bond yields as was UK-listed consumer credit rating company Experian (-13%), reflecting its exposure to a weaker US housing market outlook. Performance was strong in Japan where Recruit (+24%) is perceived as a Trump winner and is benefitting from improved HR margins, food products company Ajinomoto (+13%) reported strong numbers and a share buy back, and Advantest (+32%) gained on strong demand for AI testing. Sony (+18%) also rose on better numbers and a big beat in operating profit, MUFJ bank (+23%) continues to enjoy a tailwind from the Bank of Japan’s tightening bias and medical devices company Terumo (+9%) raised guidance. On the downside franchise food retail operator Kobe Bussan (-26%) continues to be negatively impacted by the weaker Yen.
Activity over the quarter has moved industrials overweight with the purchase of Finnish elevator installer Kone where modernisation and services are driving revenue growth and margin improvement through a positive mix effect. The stock has been relatively weak reflecting a headwind from China but remains a high-quality business with recurring revenues and strong cash flow generation. We have also re-introduced locks specialist ASSA ABLOY in Sweden which is benefitting from the structural growth in electromechanical locks and has a high proportion of revenues generated in the US. In financials we have switched BNP Paribas into Belgium financial KBC Group. The bank is high quality with above average returns, strong exposure to central and eastern Europe and is growing fee income. In Japan we have taken profits in Advantest and switched into Tokyo Electron, a global leader in WFE, following weakness over the summer as the market finally adjusted excessive order forecasts to China. The company sells industrial electronics and should benefit from AI infused products coming to market.
The valuation of cyclical sectors is high relative to history, seemingly discounting sustained economic strength. The US equity market has been bolstered by the ‘Trump trades’ and valuations appear extended and vulnerable to any economic slowdown or earnings disappointment. In these circumstances we are inclined to remain overweight the quality stocks our process favours where above average margins should protect profits in any downturn. We are zero weighted in autos where the merger of Honda and Nissan signals the vulnerability of the traditional manufacturers to the transition to EVs. We are underweight cyclical sectors such as banks and capital goods but maintain an overweight in IT. Spending on AI will continue and we are focused on three areas – enablers such as semiconductors (including design, materials and data centres), applications and data ownership . Holdings related to the former include ASML and ASM International, which manufacture semiconductor making machines, and Infineon, which supplies chips for EVs. Applications are found currently in software groups such as SAP and accounting specialist Xero. Proprietary data owners have opportunities to licence and create new value added products that drive an uptake in subscriptions, with stock examples including RELX, Experian, Wolters Kluwer, LSEG and Recruit.
The Composite fell 9.80% (9.94% Net) versus a 8.11% fall for the benchmark.