Blogs

Please see this week’s Markets in a Minute update below from Brewin Dolphin, received yesterday afternoon – 07/01/2025

In the first Markets in a Minute of 2025, Chief Strategist Guy Foster highlights three of the key economic challenges facing governments in the new year, and analyses why there’s a global slowdown in the manufacturing sector.

Happy New Year and welcome to 2025!

The start to the year was marred by news of tragic terrorist action in the U.S., which serves as a reminder of the fractious state of current affairs.

On the markets front, it’s been mercifully quiet. U.S. equities have gradually declined since Christmas Eve, and have therefore been the relative laggards over the festive period. Most other equity markets were little changed.

Just as the regional market leadership took a break, so has its sector leadership. Technology and communication services were amongst the worst performers while oil stocks outperformed. This follows a report on U.S. oil inventories, which suggested the market’s tighter than expected.

Without much news last week, we’ve taken the opportunity to look at how and when the action will return to the markets.

Last year was momentous, with half the world’s population voting in democratic elections, and the vast majority choosing to change their governments. Given that a quarter of the world live within dictatorships, we might expect a quieter year in 2025.

That would be a wild assumption. Elections can be triggered early (as France’s and the UK’s were last year, and Germany’s will be in February), and the impact of November’s U.S. election was felt as the House of Representatives appointed a speaker. Mike Johnson, who had the all-important endorsement from President-elect Donald Trump, was reelected by an incredibly slim margin of 218-215.

The Republicans won a five-seat majority in November, after which Matt Gaetz resigned. Johnson is not universally popular amongst the Republican congressmen (nobody is), so it was a test of Trump’s authority whether he could pressure them into supporting a single candidate.

Normally, we would have had U.S. employment data to discuss on the first Friday of the month. However, in deference to the holidays, they will be released this week. The expectation is that 150,000 new private sector positions were added during December. The unemployment rate probably stuck at 4.2% and wage growth at 4% per annum.

Economic growth in the U.S. was probably still quite strong, with consumer spending growing at an annual rate of at least 2% – however, purchasing managers indices released on Thursday suggested the manufacturing sector has ground to a halt. Manufacturing was contracting for most of last year in continental Europe and has been losing momentum in the UK, too. The services sector saw a marginal expansion of business activity in December, with the index increasing to 51.1 from 50.8 in November, according to the S&P Global UK Services PMI.

With this being a new year, investors will be excited to hear how companies performed during the last quarter. The earnings season starts next week, with the big day of banking results falling on 15 January.

This week is a quiet one for company news with the jobs report and the sitting of a new Congress looking like the main events for now.

Please continue to check our blog content for advice, planning issues and the latest investment market and economic updates from leading investment houses.

Charlotte Clarke

08/01/2025

Please see the below article from EPIC Investment Partners detailing their thoughts on China and the domestic/international headwinds the economy faces. Received this morning 07/01/2025.

The World Bank has raised its 2024 growth forecast for China to 4.9%, a modest increase from its previous 4.8% projection. This cautiously optimistic revision comes as the world’s second-largest economy faces significant domestic and international headwinds.

The World Bank projects a moderate cooling of growth to 4.5% in 2025, highlighting the need for structural reforms. Mara Warwick, the World Bank’s country director for China, identified key priorities: “Addressing challenges in the property sector, strengthening social safety nets and improving local government finances will be essential to unlocking a sustained recovery.”

In its most dramatic monetary policy shift in over a decade, Chinese authorities have adopted a “moderately loose” stance for 2025. This pivot has already yielded tangible results, with the People’s Bank of China’s (PBoC) signals of forthcoming interest rate and reserve requirement cuts driving 10-year government bond yields to unprecedented lows beneath 1.6%.

The economic outlook is further complicated by resurging US-China tensions, exemplified by yesterday’s confusion surrounding proposed US “universal” tariff policies. However, Beijing appears more strategically prepared this time, implementing a comprehensive approach combining retaliation, adaptation, and market diversification.

China has demonstrated its economic leverage by controlling exports of vital chipmaking minerals to the US and launching targeted antitrust investigations. Beyond these defensive measures, Beijing is actively expanding its global economic footprint, exploring preferential trade arrangements with alternative partners and investing in strategic infrastructure projects, including a major deep-water port development in Latin America.

On the currency front, the PBoC has markedly shifted its exchange rate management strategy. The central bank’s latest MPC meeting notably omitted previous references to “exchange rate flexibility,” instead introducing “three resolutes” focused on maintaining market stability and preventing excessive currency fluctuations. This explicit change in language suggests the central bank is taking a firmer stance against renminbi depreciation against the dollar.

Please continue to check our blog content for advice, planning issues and the latest investment market, and economic updates from leading investment houses.

Alex Clare

07/01/2025

Please see below, an article from Tatton Investment Management analysing the key factors currently affecting global investment markets. Received this morning – 06/01/2025

December’s market-moving events – most notably the Fed telling markets ‘bah humbug’ – didn’t spoil 2024’s year-long party in US equities; they just stopped it a little early. Investors have grown extremely confident about US growth since Trump’s election win, expecting tax cuts and deregulation, somehow coupled with ultra-efficient government and a reduced budget deficit. The ‘soft’ data (measuring confidence) has backed this up but the ’hard’ data (actual activity) has not so far. Americans will want to quickly see that their confidence is well-founded this year. 

That will be difficult if the Trump administration starts fighting itself. The Trump coalition’s ultra-conservative wing is already confronting the Elon Musk “tech bro” wing over skilled immigration. Trump himself has always been coy on policy specifics, but the specifics are now needed – which may make markets slightly less optimistic. 

Investors have been getting ever more dour about Europe and the UK. We think energy prices are still Europe’s main handicap, and the energy outlook is uncertain. Russia is now halting all gas pipeline deliveries through Ukraine – causing prices to spike – but this is being portrayed as a consequence of Ukraine’s rather than Russia’s actions, and European relations are fractured. It’s uncertain, but this plausibly could be positioning ahead of an end to fighting. That should mean lower energy prices and perhaps a brighter 2025 for Europe. 

Markets are negative about the UK. Growth is non-existent, but commentators suggest that Britain’s wage inflation will be higher than elsewhere because of short labour supply and the government’s tax policies. If they’re right, the government might have to expand the deficit further, making gilts even less attractive. That’s why the spread between UK and German bonds has reached its highest in 25 years, but this strikes us as too far, considering the economic similarities.  

2025 starts with more unknowns than usual. We have to stay a step ahead, but also accept that outcomes can be highly unpredictable when so many factors are at play. It will be an interesting year and we think diversification will be more important than ever. Here’s hoping for a peaceful, sustainable global backdrop to underpin returns.

Please continue to check our blog content for the latest advice and planning issues from leading investment management firms.

Alex Kitteringham

6^th January 2025

Please see below, an article from Tatton Investment Management analysing the key factors currently affecting global investment markets. Received this morning – 23/12/2024

Fed spoils the Christmas party

Investors weren’t expecting the Federal Reserve’s hawkish forward guidance adjustment (fewer interest rate cuts to be expected in 2025) and sold off sharply on the news. That is a big change from last year’s unstoppable ‘Santa Rally’, but in other respects we end 2024 similarly to how we started: coming off a good year for returns, unsure of whether it can be repeated. UK yields also rose to their highest this century, partly because of the Fed and partly because the Bank of England kept rates on hold.

The Fed surprise isn’t really a surprise, given US economic strength and Donald Trump’s promised pro-growth policies. We didn’t expect such a sudden hawkish shift – but we did say markets were too optimistic about US rates. Interestingly, the US mega-tech stocks suffered the most, despite being cash-rich and (on paper) immune to higher debt costs. That suggests the sell-off was a valuation correction, rather than economic pessimism.

We suspect one reason markets didn’t think the Fed would turn hawkish was that it will inevitably upset Trump. A fight over Fed independence now looks likely, and it’s not the only fight the new administration is gearing up for. Trump adviser Elon Musk sharply criticised a bipartisan budget deal that congressional Republicans just agreed, suggesting that Trump 2.0 might see the kind of government shutdown threats that used to plague Washington.

These policy headwinds are not (yet) disturbing the strong outlook for US profits. It looks like US exceptionalism will continue which, combined with Fed hawkishness, is bullish for the dollar. But, it was notable that US stocks (particularly tech) got the biggest knock-down this week, probably because of investors’ previous American optimism. US dominance creates longer-term problems but, for now, this week’s price correction makes stock valuations look healthier. That sets up the start of 2025 nicely.

How long will the BoE stay still?

The Bank of England (BoE) was in no giving mood before Christmas, holding interest rates steady last week. Markets expected as much, after November’s data showed higher wage and price inflation than the previous month. Worryingly, inflation remains while growth is weak. UK bond yields remain higher than elsewhere because investors doubt the BoE will be able to cut interest rates as sharply as other central banks. The difference between market expectations for UK and Eurozone rates is particularly stark: markets predict Eurozone rates at 1.75% by the end of 2025, while Britain’s rates are predicted to remain above 3.5%.

We are sceptical of this mismatch, though. UK yields are even higher than the US, but judging by relative growth and fiscal policies, it’s hard to make the case that Britain needs tighter monetary policy than the US. The UK has a similar inflation profile to Europe, but markets think the ECB has prices under control and the BoE doesn’t. This suggests the BoE has more scope to cut than currently expected – or that Britain is set for surprisingly high inflation.

The latest inflation numbers, while higher than October, weren’t a surprise. In fact, core (excluding volatile elements) and services inflation were below expectations, and these tend to better indicate the medium-term outlook. This isn’t to say everything is fine (housing costs and wages are a concern) but we suspect the BoE will ‘look through’ these numbers. For example, overall employment declined, despite the wage rises.

The BoE is more wary than most about supposedly ‘transitory’ supply-led inflation, so they will continue to wait and see. But the data they are waiting to see will probably be weak. That could mean more UK rate cuts than bond traders currently predict.

Chinese stimulus good, not great

China’s economic stimulus continues to underwhelm. Beijing recently announced a fiscal deficit expansion which implies RMB 1.3 trillion ($179.4bn) in extra spending, but Chinese stocks only bounced slightly and later pulled back. Weak growth – as shown by November’s disappointing retail sales – is taking the shine off policy promises, and those promises themselves are doubted. Markets doubt Beijing’s willingness or ability to solve its domestic demand problem. The clearest example of this is that Chinese government bond yields fell despite announcing new issuance.

It’s important to see the wood for the trees, though. Beijing has significantly increased its economic support since the summer and policymakers are taking the domestic demand problem seriously. In the past, stimulus was concentrated on production, which only exacerbated the supply glut, despite maintaining official GDP numbers. Previous spending also came through local governments, which have proven themselves incapable of investing efficiently.

China needs private companies to spend more, but leaders are afraid of that, after the credit and property bubbles they inflated in the 2010s. It does seem like Beijing now recognises the necessity of private sector expansion, judging by its recent cuts to key policy rates (with more expected soon). Money creation numbers suggest this is starting to work. People are moving money into current accounts, which is usually a sign they are set to spend rather than save.

It will soon be crunch time for Beijing. Once Donald Trump enters the White House (January 20) we will find out whether his “day one” tariffs are serious. That will quickly be followed by Chinese new year and the spring festival, during which we will get a better sense of whether demand stimulus is working. There are reasons to be hopeful, but it’s time to deliver.

Please continue to check our blog content for the latest advice and planning issues from leading investment management firms.

Andrew Lloyd

23^rd December 2024

Please see the below article from EPIC Investment Partners detailing their discussions on the invitation of Xi Jinping to Trump’s inauguration. Received this morning 19/12/2024.

On November 29, we published an article titled “The Art of the Deal, 2.0: A Trump Tower Thought Experiment,” envisioning a hypothetical meeting between President-elect Donald Trump and Chinese President Xi Jinping at Trump Tower. At the time, it was merely a bold premise—a thought experiment suggesting that a deal between the United States and China might be closer than it seemed. Days later, it emerged that Trump had, in fact, already invited Xi to attend his inauguration—a surprising and unprecedented move only revealed to the public in early December.

Traditionally, U.S. presidential inaugurations are domestic affairs, with foreign representation limited to ambassadors. State Department records dating back to 1874 show that no foreign head of state has ever attended, making President-elect Trump’s invitation to Xi an unprecedented departure from protocol. As Trump himself said, “And some people said, ‘Wow, that’s a little risky, isn’t it?’ And I said, ‘Maybe it is. We’ll see. We’ll see what happens.'”

Reports suggest President Xi is unlikely to attend, wary of the domestic and international implications. Attending could be seen as favouring one U.S. leader over another, complicating China’s broader diplomatic strategy. The Chinese embassy has not commented, and experts note Xi would want to avoid any perception of endorsing Trump’s leadership.

Trump’s guest list also includes Hungarian Prime Minister Viktor Orbán, Italian Prime Minister Giorgia Meloni, and Argentine President Javier Milei, each reflecting a distinct ideological alignment or potential for collaboration. Orbán, known for his nationalist policies such as strict immigration controls and crackdowns on independent media, and his strained ties with the EU over rule-of-law disputes, shares ideological similarities with Trump. His stance on sovereignty and resistance to globalist policies aligns closely with Trump’s priorities.

Notably, but perhaps unsurprisingly, Russian President Vladimir Putin was not invited, a decision that highlights the ongoing U.S.-Russia tensions and reflects Trump’s intent to avoid controversy at an already highly scrutinised event.

While it remains unclear which leaders will accept, the invitations highlight Trump’s willingness to rewrite protocol and forge unexpected alliances. Even if Xi declines, the outreach underscores a strategy aimed at reshaping global relationships on Trump’s terms, signalling a readiness to break from tradition in pursuit of his diplomatic agenda. As Trump himself said, “We like to take little chances.”

Please continue to check our blog content for advice, planning issues and the latest investment, market and economic updates from leading investment houses.

Alex Clare

19/12/2024

Please see below, Brewin Dolphin’s ‘Markets in a Minute’ update which provides a brief analysis of the key factors currently affecting global investment markets. Received last night – 17/12/2024

Although there were some hiccups in the U.S. stock rally last week, it broadly continued its strong recovery since the U.S. election. Leading the pack were the so-called Magnificent Seven, as investors raised hopes that artificial intelligence (AI) would yield more rewards and efficiency gains for technology software and cloud companies. Four of the Magnificent Seven’s stocks, Amazon, Alphabet, Meta, and Tesla, all hit record highs.

Aside from the ferocious U.S. stock rally, one piece of statistical evidence shows that animal spirt has been ignited after Trump’s victory. Last week, according to the U.S. NFIB’s Small Business Optimism Index, the outlook for U.S. business conditions saw the biggest monthly increase on record, driven by post-election exuberance and optimism on pro-growth policy shifts. Interestingly, we saw the second-largest increase of the same index after Trump’s 2016 victory. Perhaps U.S. President-elect Donald Trump can trademark the term ‘animal spirit’?

However, European stocks only made small gains, as the markets await French President Emmanuel Macron’s decision on a new prime minister. Investors are also contemplating the development of China’s stimulus plans as there was both excitement and disappointment on the stimulus guidance.

China’s ‘moderately loose’ monetary policy for 2025

At the beginning of last week, the Chinese authorities announced that their monetary policy stance will be ‘moderately loose’ in 2025. This is a significant change in guidance because for the past 14 years, the official guidance on monetary policy has been ‘prudent’. At the same time, the authorities pledged they would be ‘more proactive’ on fiscal policy and would stabilise the property and stock markets.

However, the lack of detail has remained a big issue. Investors were awaiting more concrete steps on how to boost consumer spending from the Central Economic Work Conference. One reason for this lack of detail could be because the Chinese authorities are saving some ammunition to deal with trade tariffs, as there is so much uncertainty on what Trump will do.

The other explanation is that while China’s leadership understands the need to shift policy to support consumption, it may not be able to decide on exactly how to design the right policy mix. Or it could be that the government is being ‘data-dependent’ because it feels the need to be patient so that the previous stimulus can show its impact. The bottom line is, there is clear guidance to stimulate the economy and more will come in 2025.

The U.S dollar versus the Chinese yuan

If the Chinese economy continues to struggle and faces more headwinds due to trade tariffs, China will look to deploy all possible means to stimulate the economy. This would be via monetary, fiscal and exchange rate policies.

Due to expectations of lower interest rates and worse fundamentals relative to the U.S., the Chinese yuan has been on a broad depreciation trend. Last week, there was speculation that China will devalue the yuan versus the U.S. dollar in 2025, potentially to 7.5. This should come as no surprise as it’s one of the ways to counteract the impact of trade tariffs by allowing for a more competitive exchange rate.

History has proven to be a good guide too. We’ve seen the Chinese yuan depreciate as much as 14% versus the U.S. dollar over a two-year period since the U.S./China trade war officially began in 2018. In 2015, China took the market by surprise by devaluing the yuan to support growth. This resulted in a messy situation and provided a clear lesson to manage such devaluation more carefully.

The expectation of the U.S. dollar to Chinese yuan exchange rate being 7.5 suggests there’ll be around a 3% depreciation from current levels, which isn’t much. It’s unlikely to offset the impact of tariffs that could be as much as 60%, but every little helps. China will remain cautious in managing the pace and extent of yuan depreciation, but given tariff threats and divergence in economic fundamentals, it’s unavoidable. For instance, last week, the 10-year Chinese government bond yields plunged to a record low of below 1.8%.

The problem is if the Chinese yuan depreciates, it can result in a race to the bottom for other Asian and emerging market (EM) currencies. This is particularly relevant as the euro is depreciating too, which is an anchor for European EM currencies. In an environment where there’s a stronger U.S. dollar, heightened volatility and headwinds for EM assets are more likely.

U.S. inflation changes

The U.S. saw two pieces of inflation data that suggest an improvement in headline inflation for consumer prices and wholesale prices. The first was on U.S. consumer prices index inflation, both headline and core measures came in exactly as expected across yearly and monthly measures. While headline inflation has picked up a little, investors are unlikely to be concerned amid a broadly disinflationary trend.

Meanwhile, producer price inflation has picked up more than expected. Producer prices are wholesale prices that have the potential to filter through to end-consumer prices, so the recent acceleration trend should be watched.

It’s generally expected that a stronger U.S. dollar would help keep imported inflation in check.

How will Trump’s policies impact inflation?

Trump’s policies, including tax cuts and tariffs, will likely impact inflation going forward. The consensus is that his policies are inflationary, in the near-term at least. Because inflation could be harder to tame in a strong economic environment, investors have been trimming expectations for rate cuts next year.

With the Federal Reserve fixated on cutting interest rates again in December, last week’s data is unlikely to change that. However, markets are broadly expecting a somewhat ‘hawkish cut’, meaning the guidance for monetary policy could turn more cautious despite delivering another rate cut this week.

What’s happening in Europe?

In the Eurozone, the European Central Bank (ECB) cut key policy rates as expected, but market impact has been muted as the decision was fully priced in. The good news is that the ECB continues to see inflation progressing towards its target and stabilising, evidenced by it lowering its 2024 and 2025 inflation forecasts. This is a relief, as there was concern that the sharp depreciation in the euro could push inflation a little higher than previously pencilled in.

On the negative side, gross domestic product (GDP) growth forecasts were revised down over the same period, while 2027 growth is projected to be muted too. The combination of weaker growth and disinflation allows the ECB to drop the ‘restrictive’ policy guidance. In 2025, the ECB is likely to ease policy at a faster pace compared to the U.S. and the UK due to its struggling economy and headwinds from potential tariffs.

While in the UK…

At the end of last week we saw UK gross domestic product (GDP) data for October, which contracted for two straight months. The three output measures of GDP – services, manufacturing, and construction – all detracted from growth in October.

This data isn’t great for the current government because since Labour took office, UK GDP has only expanded in one out of four months. This contrasts with the strong growth we saw in the first half of 2024, although we were rebounding from a technical recession in the second half of 2023.

Just as the U.S. displays its ‘animal spirit,’ UK businesses have turned more pessimistic on the outlook after the Autumn Budget. This is evidenced in the Bank of England Decision Maker Panel survey, which shows that businesses think hiring and revenue growth will slow, while inflation will rise.

Last week, the London Stock Exchange suffered another blow as construction equipment rental heavyweight Ashtead said it will move its primary listing to the U.S. Although the U.S. is a ‘natural long-term listing venue’ for Ashtead as it derives almost all of its operating profit from the U.S., this is another concern for the reputation and attractiveness of the UK capital markets.

Please continue to check our blog content for the latest advice and planning issues from leading investment management firms.

Alex Kitteringham

18^th December 2024

Please see the below daily update article from EPIC Investment Partners received this morning 17/12/2024:

Labour’s decision to renationalise South Western Railway, c2c, and Greater Anglia marks a significant shift in Britain’s railway policy. With these franchises nearing their contract end dates, the Labour Government is wasting no time in seeking to bring them into public ownership, promising a more “unified, reliable, efficient, and passenger-focused” rail system. But while the rhetoric is bold, questions linger, particularly around fares and the practicalities of running the network. 

Supporters of renationalisation are rejoicing. Britain’s privatised railways have long been criticised for fragmented management and poor value for money. Labour argues that public ownership will prioritise service improvements and reinvest profits into infrastructure rather than shareholder dividends. It is a popular stance, especially when passenger experiences have often been defined by delays, cancellations, and soaring ticket prices. Even high-performing operators like c2c and Greater Anglia have not been immune to these pressures, despite recent improvements in punctuality and service quality. 

However, the plan is not without its critics. Some warn that public ownership could bring its own inefficiencies, with state-run bodies potentially struggling to adapt to the dynamic demands of modern railways. Renationalisation, after all, does not guarantee operational miracles. For those lucky enough to be too young to recall the days of British Rail, the idea of a state-run network carries a mixture of curiosity and caution. While it evokes hopes for greater accountability, memories of British Rail’s inefficiency and underfunding in the ’70s and ’80s still loom large, particularly for those who experienced it first-hand (and who, incidentally, have a better chance of understanding the Beeching reference!) 

A significant sticking point is fares. When questioned about whether ticket prices would rise under government control, new Secretary of State for Transport, Heidi Alexander, deflected the query as deftly as a seasoned commuter navigating a crowded rush-hour platform. Her non-committal response left many wondering whether passengers would face increased costs to help fund Labour’s ambitious overhaul. 

Furthermore, some argue that Labour should direct its attention elsewhere in the rail industry. The rolling stock companies (ROSCOs), which lease trains to operators, are often seen as the real financial culprits. These firms continue to enjoy substantial profits, subsidised by taxpayer money. Critics suggest that addressing these inefficiencies would yield greater savings than a blanket renationalisation of train operators. 

For now, the train is leaving the station on Labour’s rail reforms. Whether it arrives on time—and at what cost to passengers—remains to be seen. For commuters, the hope is that this journey is not just political ideology but a genuine improvement for Britain’s railways. After all, as every passenger knows, it is not just about the destination but the ride itself. Sorry, that is the last of the puns as this article reaches the buffers! 

Please continue to check our blog content for advice, planning issues and the latest investment, market and economic updates from leading investment houses.

Charlotte Clarke

17/12/2024

Please see below, an article from Tatton Investment Management analysing the key factors currently affecting global investment markets. Received this morning – 16/12/2024

The Tatton Outlook 2025 – Overview

Donald Trump is the ‘known unknown’ for 2025, and the range of possible market outcomes is wide. Markets are predicting US outperformance, thanks to pro-growth domestic policies and anti-global trade policies. Economists are less certain. ‘America first’ is a plausible story, but we worry this underplays US risks and potential non-US benefits. Short-term US outperformance is likely, but the outlook is clouded beyond that.

Tariffs are the biggest threat to global trade. The consensus is that the figures Trump has thrown around are negotiating tactics, but anything close to them would dwarf Trump’s first-term levies and depress global trade flows. That could actually be disinflationary in the short-term, as shipping costs fall and businesses work through inventories built up ahead of tariff imposition.

Europe and China are weak, due to the global manufacturing recession caused by Chinese overproduction. Europe’s problems are compounded by high energy costs and, recently, political instability. These problems could continue in early 2025 but improve thereafter. Beijing will support its domestic economy and the ECB will be more accommodative than most.

Global economic divergence will intensify, thanks to Trump’s tariffs. This could push up the dollar and possibly hasten the use of other currencies (like China’s renminbi) in trade. Bond investors will likely prefer more stable policy regimes and, despite recent upheaval, underlying debt dynamics favour Europe over the US.

Markets think divergence will just mean US exceptionalism, but it could go the other way if the Fed has to have tighter policy than others and the dollar is too expensive to use. This isn’t bad for investors, just uncertain. There are risks and rewards to be found across most regions and asset classes. Diversification is crucial in 2025.

Regional breakdown

The US is strong but has more risks than markets seem to appreciate. Key to watch is the sequencing of Trump’s policy implementation, how the Fed will respond and whether foreign governments retaliate. A more aggressive Fed could undermine Trump’s pro-growth plans and set up a nasty fight over central bank independence, while China could respond with its own tariffs or by withholding key materials. Markets are taking a very positive view about how these will play out and they might be right. But if any of those factors go wrong, US assets could be volatile.

Europe is in a very weak period, but its potential upside is arguably being ignored due to political turmoil. The collapse of the French and German governments has thrust the ECB into economic crisis leadership once again, and it is expected to cut rates more sharply than elsewhere. Businesses need cheaper energy, which could come from easing Russian tensions, while elections might deliver better results than expected. Markets are pessimistic on Europe, when they should be realistic.

China might be coming out of the doldrums, but questions about government effectiveness and US tariffs remain. Beijing is seriously stimulating the economy, but not with the ‘bazooka’ of previous eras. Tariffs would undermine the benefit to Chinese stocks – which will likely remain volatile. China’s biggest impacts could come from its own tariffs or trade barriers in response to Washington.

The UK could benefit from international investment flows. The government is perceived as stable compared to European turmoil, which could benefit bonds. The BoE is more hawkish, though, which doesn’t make sense given the similar inflation pressures for the UK and Europe. Either more inflation is incoming, or the BoE should get more dovish.

Japan is seeing structural improvements to corporate profits. This, combined with a fundamentally cheap yen, makes it a good long-term play. Politics could be a stumbling block after the government lost its majority, but the profit fundamentals are strong.

Emerging Markets could suffer from Trump’s tariffs, but stronger Chinese demand could help. Latin America thought it would benefit from “friendshoring”, but Trump now wants to undo his previous trade agreements. Energy producers could struggle as the US produces more, but metals producers could benefit from rebounding Chinese demand.

Asset classes

Bonds will react to interest rate expectations, which slope down everywhere except Japan. Eurozone rates are expected to fall hardest, reflecting weak European growth. The projected trough for UK rates – 3.5% in 2026 – is significantly higher than Europe, despite similar inflation prospects. That could give the BoE greater scope to cut rates and, since UK yields have stayed higher than elsewhere this year, that could make UK bonds one of the better markets in 2025.

In general, risk perceptions of government bonds have increased this year. But recent signals of tighter fiscal policy have caused buying of long-dated bonds, which could continue into next year. Corporate bonds look expensive – but that’s really about increased riskiness of government bonds. It’s a good sign that European corporate credit isn’t distressed. US corporate credit is healthy – but corporate yields could go up if there’s mergers and acquisitions next year, as you would expect in a pro-growth environment.

Equities look well supported in 2025, with significant regional dispersion, driven by economic prospects rather than central bank policy. US stocks are expected to fare better, but we think this might be underrating US risks and non-US benefits. Positivity is still focussed on big US tech stocks – and Google’s quantum chip announcement stock surge last week showed that the AI investment theme still has momentum.

We wonder how long AI can promise future productivity without delivering it across the broad economy. No one doubts the power of technology, but when the hype is this huge, results have to come fast. 2025 might be the year investors demand those results. US tech giants service sector profits might also be vulnerable to trade wars if global policymakers retaliate against Trump tariffs.

Stocks outside the US are cheaper, but provide less profit growth. Chinese stocks keep bouncing around in response to whether or not markets like the government’s latest announcement. Despite that volatility, domestic economic momentum is building – but that has to be traded off against potential tariffs.

Please continue to check our blog content for the latest advice and planning issues from leading investment management firms.

Andrew Lloyd

16^th December 2024