In its latest GREED & fear report, Jefferies described Donald Trump’s potential second term as the greatest political comeback in American history, with significant implications for global financial markets. Dubbed ‘The comeback kid’, Jefferies emphasised that the initial reaction to Trump’s victory in both the electoral college and popular vote has been in line with expectations: a stronger US dollar, an upsurge in stock markets, and a decline in US Treasury bonds.

Dollar Outlook

While the US dollar initially benefited from a pro-growth sentiment following Trump’s electoral success, Jefferies warned that his policy agenda could ultimately be bearish for the currency over the long term. The anticipation of tax cuts and a deregulatory push are seen as short-term positives, but the sustainability of such gains may be in question as the agenda unfolds.

Stock Market Dynamics

Jefferies noted that the US stock market could see short-term gains due to expected tax incentives and deregulation, spurring ‘animal spirits’. However, there remains a risk that rising bond yields could eventually temper market exuberance. Despite these headwinds, equities have so far shown resilience in the face of tightening liquidity and peak valuations.

One area of concern highlighted by Jefferies was the deteriorating liquidity environment coinciding with historically high valuations. This liquidity squeeze, combined with mounting bond yields, could present challenges for sustained equity performance, it said.

Bitcoin’s Unprecedented Boost

Trump’s campaign rhetoric also embraced Bitcoin, an asset he pledged to champion by creating an official US Bitcoin strategic reserve. This move was viewed as a key factor in Bitcoin’s surge to an all-time high, given the US government’s current stockpile of around 208,000 Bitcoins, or 1 per cent of the maximum supply of 21 million. Jefferies maintained its 5 per cent allocation to Bitcoin in its global long-only equity portfolio, affirming confidence in the digital asset’s long-term potential.

Gold: Continued Appeal

Jefferies expressed ongoing optimism for gold, citing data from the World Gold Council that showed central banks as net buyers through the third quarter of 2024, albeit at a reduced rate. Central bank purchases reached 694 tonnes for the first nine months of 2024, with a noted decline from 305 tonnes in Q1 to 186 tonnes in Q3. The report emphasised gold’s attractiveness as a hedge in an environment where fiscal and monetary policy adjustments could favour inflationary trends.

US Fed’s Policy and Market Implications

GREED & fear discussed the US’s fiscal challenges, which have motivated the Federal Reserve’s recent rate cuts, including a larger-than-expected 50 basis point cut in September and another 25 basis point reduction recently. Jefferies noted that these policy moves are aimed at mitigating liquidity issues but also signal potential near-term risks for equities, as highlighted by Warren Buffett’s recent selling activity during a period when the US stock market hit a market capitalisation of 203 per cent of GDP.

Valuation concerns were further underscored by the S&P 500’s price-to-sales ratio, which rose to 3.21x, approaching its November 2021 peak of 3.27x. While equities have remained robust despite rising bond yields—such as the 10-year yield’s brief touch at 5 per cent—the strain may become more apparent, particularly as valuations continue to stretch, Jeffeires’ note stated.

Bonds and Yield Curve Control

Jefferies reiterated that the stock market’s ability to withstand rising bond yields has been remarkable but may be short-lived. Yield curve control, as a policy response to America’s fiscal issues, is viewed as potentially bullish for equities but bearish for the US dollar due to implications for Federal Reserve balance sheet expansion and currency depreciation. Emerging market equities and gold are expected to benefit from a weaker dollar and related policy moves.

Indian Stock Market Outlook

Jefferies took a positive view of the recent corrections in the Indian stock market, noting that it has affected the costliest segments while boosting the performance of relatively undervalued private sector banks. Expectations for a cash reserve ratio (CRR) cut by the Reserve Bank of India have fueled further optimism, it said.

Robust domestic equity mutual fund inflows also contribute to market strength, with net inflows peaking at ₹450 billion (USD 5.4 billion) in June and maintaining a strong level of ₹405 billion (USD 4.8 billion) in September, observed the global brokerage firm. 

Domestic equity inflows have averaged USD 7.5 billion per month in 2024, contrasting with a rising supply of equity issuances aimed at capitalising on high valuations, added the report.

Portfolio Strategy

Jefferies maintained a constructive stance on gold mining stocks, with positive performance linked to cash-generating miners. The GREED & fear report noted disparities among major miners, such as Agnico Eagle’s 52 per cent year-to-date rise, outperforming bullion’s 29 per cent gain, while Barrick Gold lagged with only a 2 per cent increase.

Lastly, adjustments were announced for Jefferies’ Asia Pacific ex-Japan relative-return portfolio. The report indicated a one percentage point increase in China’s weighting to Neutral, offset by reductions in Australia and Indonesia. Singapore’s weighting was also raised by half a percentage point at the expense of Thailand.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.