- Investors are all-in with “Trump trades” presently.
- That includes long USD, long gold, long cryptos, long US stocks, and short US rates duration.
- But there are genuine concerns about stratospheric valuation of USD assets.
- A series of tactical trading opportunities could open up after Trump’s inauguration.
- We think Asian assets could see sizeable flows from 2Q25 onward.
Commentary: Notes from UK/Europe
Our discussions with UK and Europe-based clients last week focused on near-term opportunities and medium-term risks. Largely, it has been a good year for asset managers in both DM and EM assets, although trades have been highly correlated and returns have been biased toward USD assets. Heading into the end of 2024 and looking ahead to the US presidential inauguration, asset managers’ positioning came across to us as rather uniform.
No one is inclined for fight “Trump trades” at this juncture, remaining long USD, long gold, long cryptos, long US stocks, and short US rates duration. Those with exposures to EM and DM corporate credit are comfortable with hard currency exposure, although the highly compressed spreads cast doubt on room for further rally. As for local currency credit, especially those from Asia, we found investors underweight substantially.
The rationale is straightforward—firstly, on stocks, US economic performance remains strong, pointing to sustained earnings growth for companies and income growth for individuals. Valuations are elevated by all measures, but appear to be sustainable for now, given investor interest. Secondly, on the USD, pricing in any type of tariff imposed by the incoming Trump administration would entail selling EM currencies against the US dollar, a trend that has accentuated over the past month. Thirdly, on bonds, risks of a trough in inflation and tax-cut fuelled fiscal expansion have manifested in the short-duration trade. Finally, on credit, likelihood of higher-for-longer have yet to dent confidence of corporate and household borrowers.
Against this backdrop, the Asia underweight trade also makes sense. Uncertainty around the Trump tariffs will get this trade going through 1Q25, in our view.
We picked up considerable concerns on Europe, from geopolitics (rise of the far right, government instability, Russia-Ukraine war, relationship with the US) to economics (future of the auto industry in the face of fierce competition from China, substantial need for fiscal reform, underwhelming productivity growth) to social (immigration policy). Investors find scant opportunities in the continent, pushing them toward overweight US assets.
Looking past 1Q25, we found resonance with the argument that wide ranging tactical opportunities could emerge. There is a limit to how far the current frenzy around US stocks can last. European equities, although shunned presently, could come back into play next year given their cheap valuations. Both USD and US dollar assets could undergo a correction after the US presidential inauguration as inconsistencies in Trump’s economic model (tariffs plus weak USD, tax cut plus fiscal consolidation, immigration crackdown plus disinflation) are scrutinised by the market.
Similar tactical trades could come in vogue for Asia. While right now little differentiation is being made to risks faced by North Asian versus Southeast Asian economies, China versus India, exporters versus local demand players, such considerations will make sense from 2Q25 onward, in our view. We sensed substantial interest in Asian hard currency assets, including those from China. We look forward to the flows next year.
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Nathan Chow 周洪禮
Senior Economist and Strategist - China & Hong Kong 高級經濟學家及策略師 - 中國及香港
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