“Political catalysts shape global market sentiment”

Marco

In today’s outlook, we discuss the implications of the recent Japan elections and the “Trump premium” priced into equities across the US, EU, and Japan. With the announcement of the US election results, investors anticipate increased volatility alongside sector-specific impacts.

Strengthening Yen and the BoJ’s Policy Path

The BoJ is cautiously moving toward policy normalisation after years of ultra-loose monetary easing. Yet, the yen’s medium-term trajectory will hinge on Japan’s ability to sustain inflation and wage growth. As Japan works to balance inflationary pressures, any persistent yen strength could attract investors seeking stability outside the US dollar.

However, with Japan’s Liberal Democratic Party (LDP) losing its parliamentary majority, passing critical policies could face delays and impacting the BoJ’s pace of rate adjustments. Despite this political setback, the market anticipates a 35-basis-point rate hike within the next year. Investors should closely monitor Japan’s political developments, which could influence the BoJ’s policy stance and the yen’s strength over time.

The USD/JPY is already reflecting a Trump win, with the dollar appreciating 4.68% month-to-date in October. A potential rally toward 160 may prompt BoJ intervention and trigger another reversal in the yen carry trade.

Global Equities Under the Trump Premium

The Trump premium is clear, with EU and Japanese equities underperforming relative to the US, down -4.07% and -4.94% month-to-date in October, respectively.

US banks have outpaced the S&P 500, up 6.58% month-to-date in October, amid expectations of capital requirement relaxations. Conversely, US healthcare has underperformed, down 3.63%, weighed by regulatory risks, including potential drug pricing reforms.

Tariff concerns under a Trump administration continue to challenge EU exports, with luxury brands facing additional pressures as Chinese consumption weakens. Notably, the EU luxury sector is down 2.41% month-to-date in October.

Conclusion

While the US election result may initially amplify or dissolve the Trump premium, historical data suggests that election outcomes rarely produce lasting effects on equity markets. The volatility accompanying this election cycle provides opportunities for tactical asset allocations, particularly in areas like Japanese equities and selective US sectors, positioning portfolios for resilience and growth post-elections.

Equities

Major U.S. tech companies—Microsoft, Amazon, and Google—are making substantial investments in artificial intelligence, particularly within cloud services, and in the last quarter, these firms reported impressive cloud revenue growth, with year-over-year increases ranging from 20% to 36%, resulting in a combined cloud revenue of $62.9 billion, marking a 22.2% growth. This growth reflects the increasing demand for AI-driven solutions that require significant computational resources, justifying the multi-billion-dollar investments in data center expansions and showing early returns both in terms of revenue and competitive positioning. However, capital expenditures (CapEx) remain a critical indicator of the sustainability and scalability of these investments, as together, the three companies spent over $50 billion on infrastructure and technology, approximately $20 billion more than the previous year. While this reflects an aggressive push to expand AI capabilities, it also raises concerns of potential overextension; Microsoft’s recent 6% stock dip, following adjustments due to data center capacity constraints, serves as a reminder of the challenges inherent in this expansion. Despite these short-term hurdles, tracking CapEx trends will be essential to gauge the long-term returns and competitive edge these firms are building within the AI sector.

In China, the macroeconomic landscape remains under strain despite recent stimulus efforts, with credit growth sluggish even amid rate cuts and increased liquidity, signaling that consumer confidence has yet to recover meaningfully. The real estate sector, which is crucial to China’s economy, continues to suffer, as property prices have dropped by 5.7% year-over-year, contributing to record lows in consumer confidence that reflect the broader economic malaise. On a more positive note, there has been slight resilience in the manufacturing sector; the Manufacturing PMI rose to 50.3 in October, indicating a marginal return to growth largely driven by stimulus measures introduced in late September, though sustaining this momentum will be critical for achieving a broader recovery.

Meanwhile, with the 14th National People’s Congress session underway, market speculation points to further multi-year fiscal stimulus measures intended to stabilize growth. Current estimates for this potential package range from RMB 2 trillion (US$280.9 billion) to over RMB 10 trillion (US$1.404 trillion), with proposed actions likely including special-purpose sovereign bonds and increased local government debt ceilings aimed at spurring credit expansion and addressing economic imbalances. While these measures could provide necessary support to the economy, the government faces the complex task of balancing fiscal expansion with high existing debt levels, which makes large-scale stimulus deployment challenging; for any stimulus to be effective, it must be not only substantial but also strategically targeted to bolster consumer confidence and foster sustainable growth. To achieve long-term economic stability and meet the 5% GDP growth target, China will require well-structured, impactful stimulus measures, and we recommend investors closely monitor upcoming policy announcements and economic data to evaluate the tangible effects of these initiatives.