CICC: Trump's election victory boosts global assets' optimistic expectations in the short term, but mid-term stagflation risks are significantly rising.

CICC released a research report stating that the tax policies in Trump's agenda supporting economic growth may not take effect quickly, but the tariff policies that could lead to "stagflation" pressure may progress more rapidly under certain conditions. Trump's victory in the short term may boost optimistic expectations for global assets, but the tariff policy may land faster, potentially exerting significant "stagflation" pressure on the economy in the medium term and increasing uncertainty in the Feds interest rate cut path. Therefore, it is suggested to reduce holdings in U.S. bonds, increase holdings in U.S. stocks, maintain an overweight position in gold, and underweight commodities. For Chinese assets, trade protection and technology restrictions may cause disruption in the short term, but the medium to long-term performance will largely depend on domestic economic fundamentals and policy responses. Event: According to mainstream American media such as AP, Trump won the presidential election on November 6th Beijing time. On the day of the election, former President Trump won almost all swing states with a significant lead over Democratic presidential candidate Harris, securing his victory. In the congressional elections, the Republican Party has also won the Senate, and there is a high probability of also winning the House of Representatives, achieving a "sweep". CICC's main points are as follows: Economic Insights: Short-term boost to optimistic expectations, significant increase in stagflation risk in the medium term. Trump's main policy proposals include imposing tariffs on foreign countries, cutting taxes domestically, expelling illegal immigrants, and easing financial regulations, with the three following points having the biggest potential impact on economic operations: 1) Tax cuts domestically are the strongest policy supporting economic growth in his agenda, but the implementation may be delayed, resulting in higher debt pressure and reducing the long-term growth prospects of the economy. The University of Pennsylvania Budget Model predicts that if Trump permanently extends the Tax Cuts and Jobs Act, it will increase the U.S. GDP by 0.3 percentage points over the next decade, but will increase the U.S. fiscal deficit by around $4 trillion. The risk of imbalance in U.S. debt will significantly increase. More importantly, the positive effects of tax cuts on growth may not be realized immediately. Referring to the process of implementing the 2017 tax reform act, Trump's tax cut policy needs to go through a legal process, taking around a year from proposal to implementation. Moreover, this round of tax cuts includes many policies that extend the tax cuts originally set to expire in December 2025, so this round of tax cuts may not boost economic growth until 2026. 2) The tariff policy may land faster and potentially exert significant "stagflation" pressure on the economy. During the 2018 U.S.-China trade war, it took nearly 11 months from initiating an investigation to officially imposing tariffs. However, if Trump is re-elected, he can continue to use the conclusions of the previous term's investigations and could implement tariffs in a relatively short time. If this policy lands quickly, it will have a noticeable "stagflation" effect on the economy. According to the median estimate of overseas organizations, if Trump's proposed "imposing 60% comprehensive tariffs on China and 10% comprehensive tariffs on other countries" is implemented, it could drag down the U.S. GDP growth rate by about 1 percentage point in 2025 and increase U.S. inflation by about 1.4 percentage points. 3) Expelling illegal immigrants could also have a similar "stagflation" effect, but the uncertainty of policy implementation is relatively high. According to the U.S. Congressional Budget Office's estimates, since the end of 2020, over 9 million people have immigrated to the U.S. through legal and illegal channels, becoming a significant force in increasing the labor market supply after the pandemic. Expelling illegal immigrants would decrease the labor market supply, leading to wage inflation. Rising wages will increase production costs, suppressing economic growth. However, due to the large number of illegal immigrants and the difficulty in organizing large-scale expulsion, the progress of this policy has a higher degree of uncertainty. In summary, the tax policies supporting economic growth in Trump's agenda may not take effect quickly, but the tariff policies that could lead to "stagflation" pressure may progress faster. With the economy already facing downward pressure in 2025, the risk of economic stagflation has significantly increased in this context. Policy Insights: Significant increase in uncertainty in the Feds interest rate cut path. Before the announcement of the U.S. election results, the baseline scenario for the bank was declining U.S. inflation, with growth falling before rebounding, and a Fed interest rate cut cycle ranging from 200-300bp. However, the stagflation risk caused by the "Trump sweep" has greatly increased the uncertainty in the interest rate cut path. If U.S. inflation significantly rebounds in 2025, the bank believes the Fed may slow down or pause interest rate cuts in 2025, or even consider raising rates. In fact, the market has already started to factor in this possibility: although the Fed's September dot plot shows 100bp cuts in both 2025 and 2026, the federal futures market shows that the Fed's interest rate cut cycle will end in June 2025, with a cumulative cut of 150bp to 3.5%. It is worth noting that the Trump policies in 2025 will significantly push up inflation, but if the Fed tightens monetary policy as a hedge, it may mitigate upward pressure on inflation, avoiding secondary inflation, but at the cost of higher policy rates. After 2025, the inflationary effects of Trump's policies will gradually diminish, while the drag effects on growth will gradually show, possibly creating conditions for the Fed to accelerate interest rate cuts again. Asset Insights: Reduce holdings in U.S. bonds, increase holdings in U.S. stocks, maintain an overweight position in gold and underweight in commodities, Chinese assets dependent on policy responses. Since hitting a high of 5% in October 2023, U.S. bond yields have entered a phase of volatile decline. After the probability of a "Trump sweep" increased, there have been significant changes in the market outlook: The risk of secondary inflation pushes up expectations of the terminal interest rate, and the risk of fiscal imbalance raises the long-term term premium. If the Republican Party confirms control of both houses, the bank recommends exiting long U.S. bond trades. tactically, as U.S. bond yields have already priced in many expectations of a "Trump sweep" since September, with the 10-year yield rapidly increasing by nearly 90bp, there is a possibility of a short-term increase and fall in yields. It is recommended to gradually reduce holdings in U.S. bonds, taking advantage of market short-term volatility. After Trump's victory eliminates uncertainty in the election, expectations of fiscal expansion increase.Warm, market trading is risk-on, short-term benefitting stock performance. However, the implementation of Trump's tax reduction policy may not materialize until 2026. If tariffs and immigration policies are implemented first in 2025, it may increase the risk of economic stagnation. Therefore, the uncertainty of overseas stocks remains relatively high in the medium term. Therefore, it is recommended to increase allocation to overseas stocks in the short term and reduce allocation at the right time in the medium term.Stagflation risks are compounded by further imbalances in US debt, reducing the credibility of the dollar system and providing continued support for gold, with the bank maintaining an overweight position in gold. Trump opposes green transformation, increasing oil and gas supply, and in the short term, global economy is still in a downward channel, suppressing commodity demand, so the bank maintains a underweight position in copper and oil and other commodities. For Chinese assets, although trade protection and technological restrictions may cause short-term disturbances, the medium to long-term performance of assets still depends mainly on domestic economic fundamentals and policy responses. Since September, the "stabilizing growth" policy has been significantly strengthened, and the outlook for Chinese assets is not pessimistic. It is recommended to focus on domestic demand-related sectors and strategic emerging industries.