Citi Global Wealth Investment analysts Steven Wieting, Joseph Fiorica, Ken Peng, Guillaume Menuet, Cecilia Chen, Joseph Kaplan and Melvin Lou have updated their global economic forecasts ahead of the US elections, raising their US real gross domestic product (GDP) estimate for 2024 from 2.4% to 2.7% and 2025 real GDP estimate from 2.3% to 2.4%.
In a report released on Oct 26, the team attributes this to stronger-than-expected tracking data for the US economy.
Furthermore, “following disappointing data this year and more aggressive policy announcements”, the team has raised its GDP estimate for China from 4.8% to 5.2% in 2025.
The team notes that there are potential portfolio implications.
Currently, the team’s overweight positions are generally concentrated in US assets in both equities and bonds.
The team expects new record highs in US corporate profits next year and keeps their global equity allocation 4.5% overweight this month, while global fixed income and cash remain 4.5% underweight.
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Earnings per share (EPS) growth has been faster in the US equity market than other large regions, while emerging markets (EM) in Asia, a region the team is slightly overweight in, anticipates double-digit EPS gains this year.
Europe is expecting a 3.6% regional EPS gain while Latin America is expecting a 1.8% gain. This is in comparison to a 10% gain for the US with 29% for US large-cap tech shares.
The team notes that in the bond market, US sovereign yields have been higher than all but a particular group of EM, mainly in Latin America.
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“Looking forward, we believe valuation favours the rest of the world over the US in equities. Yet US political risk could favour further gains for the US. These issues are the reverse for the bond market,” the team adds.
According to the team, US equities have consistently outperformed the rest of the world for 15 years with both profits and valuations generally increasing.
Under President Trump, US equities grew at a 16% annualised rate while US equities grew at a 14% annualised rate during Biden’s administration. This does not take into account inflation, which would lower realised returns.
The team notes that changes to the US domestic tax policy and potential tariffs could affect global interest rate and foreign exchange trajectory in the next year. Alternatively, status quo policies may be maintained.
In the scenario where US trade and tax policies remain unchanged, Fed rate cuts could ease a strong US dollar, which would benefit the rest of the world. Conversely, the team notes that with Fed easing “strongly embedded” in bond market valuations, a sharp increase in the US dollar seems highly likely if US trade and tax policies follow Trump’s stance.
The team takes an optimistic view, with their updated economic forecast, before major US policy changes are considered, suggesting a broadening of profit gains across regions and industries globally. China’s actions to combat deflation could also serve as a helpful catalyst in 2025.
Furthermore, the team notes that if the US does not take strong fiscal actions to stimulate demand, US interest rates could remain on an easing track to allow for global easing in line with key central banks this year.
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“But if the US does stimulate demand while restricting foreign supplies, it could turn [to] challenge the dovish narrative,” the team notes, adding that “it is not difficult to image a 100 basis points (bps) difference in US yields under opposing political scenarios.”
The team remains conservative on non-US allocations given post-election US policy, although they recognise that potential opportunity is building. US equities have outperformed non-US by 15 percentage points (ppts) over the last 12 months, but Asia looks broadly appealing for growth and valuation.
“Regionally, however, Asia stands out for having markets with growth, value and positive historical performance when US rate or foreign exchange (FX) pressures ease,” the team says, adding that “A large, concentrated positioning China’s recovery is not necessary to take a more positive view.”
The team notes that shares across EM and developing markets (DM) in Asia are trading at about 15 times this year’s profits, with EPS anticipated to increase at a double-digit pace in 2024 and 2025.
Additionally, regional shares could benefit from the changes to China’s economic policy to address the implications of a burst property bubble and industrial deflation.
