Market volatility partly driven by structural changes, says Ben Powell

The US election results will have major implications on the global economy and markets. With Donald Trump’s victory and Republicans taking control of the Senate, tax cuts, deregulation, and tougher trade policies are expected, says Ben Powell, chief investment strategist for West Asia and Asia-Pacific at BlackRock Investment Institute. In an email interview with Samie Modak, Powell shares his insights on the US economy, the Federal Reserve’s (Fed’s) decisions, and the broader global economic outlook. Edited excerpts:

 

What impact does the US election result have on the world economy and markets? 

Donald Trump has won the presidency, and Republicans are retaking control of the Senate. A Trump win opens the door for tax cuts, deregulation, and tougher trade policies. House control is key. Elevated budget deficits are likely to push inflation higher and raise long-term Treasury yields.

 

In the short term, we expect US equities to benefit from solid economic and corporate earnings growth, political stability, and Fed rate cuts.

 

The longer-term outlook depends on how much of Trump’s agenda is enacted. We believe the energy, financial, and technology (tech) sectors will see some advantages, partly due to deregulation.

 

We’re neutral on long-term US Treasuries and prefer medium-term maturities and high-quality credit for income, but we expect yields to rise as investors seek higher compensation for holding bonds.

 

How do you view the Fed’s recent decision to cut rates by 25 basis points (bps)?

  Markets barely reacted after the Fed cut rates by 25 bps. The more telling part of the Fed’s press conference was what wasn’t addressed. Fed Chair Jerome Powell reaffirmed the Fed’s meeting-by-meeting approach, noting that the future direction of policy rates and the pace of cuts are still unclear. He batted off questions about the potential effects of President-elect Trump’s policy plans, saying he would wait for actual policy to take shape. Powell also did not comment on financial conditions remaining relatively loose after one of the sharpest rate hike cycles in Fed history. He noted that inflation has fallen without the usual rise in unemployment but didn’t explain why that’s the case.

 

How many more cuts can we expect? 

We believe the recent market volatility is partly due to markets interpreting structural changes through the lens of a typical business cycle. Given persistent inflation pressures, we don’t expect the Fed to cut as much as markets predict. We see structural factors at play — such as geopolitical fragmentation and ageing populations — that are helping to shape this unusual macro environment. This is not a typical business cycle. The unwinding of pandemic-related supply shocks and a temporary boost from immigration have played a big role in cooling inflation. 

 

What is driving the recent turbulence in the debt markets?

  In the short term, shifting market narratives can create sharp volatility and large swings in yields, as we’ve seen recently. Macro uncertainty is driving sharp interest rate swings, making long-dated government bonds less reliable as portfolio diversifiers. However, these swings, along with the return of total income in bonds, are creating investment opportunities that we are seizing.

 

What are your views on China? Are there more legs to the rally, given how relatively cheap Chinese stocks are?

  We are modestly overweight in the short term. Major fiscal stimulus may prompt investors, given that Chinese stocks are undervalued compared to developed market stocks. However, we are ready to pivot and change our view if trade restrictions ratchet up.

 

Long-term, we remain cautious due to China’s structural challenges, including geopolitical and economic competition, the need to reform its indebted economy, and an ageing population.

 

Both the US and Indian markets have done fairly well over the past year. How do you assess the year from an equities market perspective? 

The rise in US equities has been driven by earnings growth. We prefer broad US equities, as we expect corporate earnings to keep improving beyond the tech sector. Fed rate cuts and solid economic activity underpin our positive view. We believe mega structural shifts, such as demographic changes and the rise of artificial intelligence (AI), will continue to influence global returns.

 

India is a strong example of this. Its growth as a global economy stands out in an otherwise lacklustre global growth backdrop. We see mega forces providing compelling opportunities as they reshape India’s economy, driven by supercharged digitisation that has revolutionised financial transactions, favourable demographics, and India’s relative success in navigating a geopolitically fragmented world. All these brighten the country’s long-term outlook.

 

What’s your outlook for next year? 

We stay risk-on as US inflation cools, interest rates fall, and growth eases slowly. We stay overweight on US stocks and remain bullish on the AI theme, as investment in AI is still in its early stages. Our preference for AI extends beyond tech, with sectors like energy and utilities also benefiting.

 

In the first phase of AI’s development, investors are questioning the scale of AI spending by major tech companies and whether adoption will speed up. We think patience is key, as AI buildout still has far to go — we turn to first-phase beneficiaries in energy and utilities providing key AI inputs, and real estate and resource companies tied to the buildout.