Between inflation, the labour market and economic power
Read the market analysis and fund positioning
On 20 January, Donald Trump was sworn in as the 47th President of the United States. This marks the beginning of four years of Trump-style policies, which are likely to focus primarily on strengthening the domestic economy. “This is positive news for the US equity market and we have adjusted our portfolios accordingly," says Jörg Held, Head of Portfolio Management at ETHENEA.
“The main question is what exactly the Trump administration plans to do and how fast it will move. Our view is that it will move quickly and focus primarily on strengthening the US economy. This is likely to be done initially through tax cuts and deregulation, as Donald Trump has already announced on several occasions.”
Pressure on interest rates
Interest rate policy is an important tool for promoting economic development. The new administration is aggressively calling on the US Federal Reserve to lower interest rates faster and more aggressively than currently planned. Shortly before the end of 2024, the central bankers had lowered the key interest rates by 25 basis points, but emphasised that they wanted to slow down the pace of further easing in 2025.
For US President Trump and his advisors, this is a fine line. They need fresh fuel for the economic fire and want to boost the broader US economy, especially as the momentum of the initial AI boom and the 'Inflation Reduction Act' begins to fade. This was promised to the electorate and under no circumstances should the labour market be weakened. Furthermore, the further escalation of the national debt needs to be at least partially contained by austerity measures.
The new Trump administration will, however, avoid putting too much pressure on the Fed. An attack on its independence would raise eyebrows both nationally and internationally. This scenario would have the potential to shake confidence in the US capital market and thus the already challenged status of the US dollar and its dominance.
Business-friendly policies
However, the Trump team will hardly need much persuasion. The Fed, unlike the ECB for example, has a dual mandate: in addition to price stability, which currently consists mainly of fighting inflation, it is also obliged to maintain an intact and healthy labour market.
The Fed is in a comfortable position in its fight against inflation. The latest economic data confirm that the rise in consumer prices has slowed. This gives the Fed sufficient evidence to act appropriately. We currently believe that there is more potential for rate cuts than is currently priced into the market. The consensus is for a couple of rate cuts this year, which we believe will prove to be wrong. We now expect the Fed to ease more often, which should also support the economy.
Barring any external shocks, US economic growth should be around 3%. This growth could lead to high single-digit to low double-digit gains in equity markets.
Role of the US dollar
Our current euro optimism is driven by the conviction that concerns about US tariffs and coercive measures are overdone. Both inflation and the US dollar exchange rate would be driven up, with negative and undesirable consequences for the US economy. Rather, we believe that the US president and his team of economic advisors are pushing for lower interest rates and a weaker US currency. In this respect, and contrary to the current market consensus, we expect the US dollar to enter a weaker phase. In line with this conviction, we have hedged the currency exposure of our securities positions.
Conclusion: For us, 2025 will be characterised by the targeted tactical exploitation of opportunities and a stable strategic orientation. With a clear focus on quality, we are ideally positioned to always navigate and react flexibly - for sustainable value creation and a focused portfolio that is successful in the long term.
Please contact us at any time if you have questions or suggestions.
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