Economist Andrew Hunt and Director Jonathan Ramsay discuss the global economic outlook following the recent U.S. election, which has created a "dust cloud" of uncertainty. While equity markets have generally sailed through the uncertainty buoyed by ample liquidity, risks are emerging that could stress test vulnerable parts of the global economic system in the coming years.

Near-Term Outlook: Liquidity Fuels Market Support

In the near-term, markets are likely to remain supported by the current liquidity-driven environment. Central bank easing and fiscal measures, such as the anticipated run down of the the U.S. Treasury General Account (which now stands at a historically high $800bn), may offer a tailwind for risk assets over the next three months. However, seasonal factors and year-end positioning may lead to some bumps along the way.

Medium-Term Risks: Trade Barriers and Deflationary Shocks

Looking beyond the next quarter, risks tied to tariffs and trade barriers could destabilise global trade. These deflationary shocks may exacerbate already weak trade volumes. In response, countries could devalue their currencies to remain competitive, triggering a "race to the bottom."

Early signs of strain are evident in fragile economies like France and Emerging Markets reliant on U.S. dollar liquidity. If these dynamics persist, a global recession scare by mid-2025 could prompt central banks to step in with another round of quantitative easing and yield curve control.

Long-Term Inflationary Threats

If this scenario unfolds, central bank intervention might stabilise markets temporarily, it could lead to long-term inflation risks. By the late 2020s, over-reliance on monetary easing could erode central bank credibility, potentially creating stagflation reminiscent of the 1970s.

Investment Implications: Balancing Caution and Opportunity

Navigating this complex environment requires adaptability and strategic decision-making:

- Focus on Quality: Traditional valuation metrics and passive indexing may falter in a market dominated by now very expensive mega-cap tech stocks. Emphasising stock selection and identifying under-owned quality names could provide more stability.

- Active Management or Specific Risk Factors: High concentration risk in indices makes active or niche strategies increasingly appealing. Incorporating macroeconomic analysis into sector and factor decisions will be critical.

- Inflation Protection: Investors should explore creative ways to hedge against inflation while targeting long-term value opportunities. This may include diversifying into assets that balance growth with inflation resilience.

As the global economy transitions through liquidity-driven support, deflationary shocks, and inflationary risks, investors will need to adapt their strategies. Success will depend on blending active management, strategic allocation, and innovative investment design. The easy gains may be behind us, but opportunities remain for those prepared to think beyond traditional approaches.

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