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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.

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Andrew Lloyd

16^th December 2024

Please see the below article from Brooks Macdonald detailing their thoughts on global markets. Received this morning 12/12/2024.

What has happened  

Equity markets had a decent day yesterday, patently satisfied with the latest in-line-with-expectations reading for US consumer inflation and raising hopes that the US Federal Reserve (Fed) will next week cut interest rates one last time for 2024. The US S&P500 equity index was up +0.82% and sitting less than 0.1% below its recent all-time high, whereas the ‘Magnificent 7’ group of US megacap technology stocks (Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla), was up +3.08% hitting a fresh record high. Over in Europe, the pan-European STOXX600 equity index rose +0.28%, while the UK FTSE100 equity index rose +0.26%, all in local currency price return terms.

Markets overlook still-sticky US inflation

On the face of it, both the annual headline ‘all-items’ and core (excluding energy and food) US Consumer Price Index (CPI) readings of +2.7% (vs +2.6% in October) and +3.3% (flat on October), respectively, were as expected. Markets certainly reacted that way, and derived from Fed Funds futures interest rate contracts, expectations for a Fed cut of 25 basis points (bps) at next week’s meeting decision day (Wednesday 18 December) rose to an almost certain outcome of 99% implied probability by the close yesterday. However, dig into the latest 3-month-annualised rate of change, and there is a slightly ‘sticky price pressures’ interpretation perhaps – the latest 3-months annualised US core CPI inflation rate to November was higher, at +3.7%, and up from +3.6% for the 3-months annualised to October.

European Central Bank meets today

Before we get to the Fed next week, later today sees the turn of the European Central Bank (ECB) to set interest rates, due out at 1.15pm UK time. The ECB are widely expected to cut their deposit interest rate by 25bps, taking it down to 3%. If that happens, then the ECB would have made a total of 100bps of cuts to the deposit rate in 2024, since they began their rate-cutting cycle back in June. On the subject of central banks, over in Canada yesterday the Bank of Canada delivered a 50bps interest rate cut, the second such-sized cut in a row, and taking rates there down to 3.25%, and making a total of 175bps of cumulative cuts this year.

What does Brooks Macdonald think

Over the past 6 months or so, there has been on balance a growing interest-rate-cut narrative develop – in broad terms, it has been the acknowledgement by central banks in most developed economies around the world that with inflation not yet sustainably at target but clearly moderating none-the-less, there is enough room for previously tight monetary policy settings to be eased back. Even a key hold-out, Australia’s central bank earlier this week, while again leaving rates unchanged, hinted at a possible interest rate cut to come next year, saying that they were “gaining some confidence that inflation is moving sustainably towards target”. All in all, while there is still much debate around where interest rates will eventually settle at, this developed-economies broadening interest rate cutting backdrop should be supportive for risk assets as we look forward to next year.

Bloomberg as at 12/12/2024. TR denotes Net Total Return.

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

12/12/2024

Please see below, an article from Brewin Dolphin providing a brief analysis of the key factors currently affecting global investment markets. Received this morning – 11/12/2024

As Americans returned to work following the Thanksgiving weekend, they were immediately confronted by an unfolding political crisis in France, an evolving interest rate trajectory for the U.S., and the release of the all-important November U.S. non-farm payrolls employment report.

U.S. employment bounces back

The U.S employment report came close to expectation, with jobs growing by 227,000 in November. This figure reflected a bounce-back after a very weak report last month, when employment was impaired by storms.

The report, which consists of non-farm payrolls data as well as a household survey, was mixed, which investors seem to interpret as supporting the case for a U.S. interest rate cut in December. This is due to the household survey indicating a weakness in jobs growth, which contributed to a pickup in unemployment.

However, a shrinking labour force, with lower labour participation and slightly faster wage growth, also means there’s something here for the hawks, too.

With a week to go, the Federal Reserve (the Fed) seems willing to cut interest rates now, even if it’s not committed to further cuts after that. Fed speakers Christopher Waller and John Williams have both suggested they’re open to cutting interest rates in the future, which this report probably supports.

The Fed’s decision will depend on the path of inflation. The slight stickiness we’ve seen recently doesn’t seem to be enough to dissuade members from believing that price growth is continuing to moderate. This was emphasised by Fed Chairman Jay Powell, who said inflation isn’t quite where the Fed wants it, but progress is being made.

The non-farm payroll report left global equity markets on track for a broadly positive week, with most major indices ending in the green. Despite turmoil in France, European shares led the charge.

However, last week’s market news was dominated by a mix of economic and political events that left investors on edge.

Political twists weigh on investor sentiment

The French government’s budget crisis, which has been going on for months, deepened last Monday, with the far-right National Rally party threatening to vote down the government’s budget bill. A vote of no confidence took place last Wednesday as the far-left and far-right joined forces to oust Prime Minister Michel Barnier’s government. President Emmanuel Macron is searching for a new prime minister, though the same set of challenges remain, which will ensure difficulty in passing a 2025 budget.

In the U.S., the focus was on the Department of Government Efficiency, led by Elon Musk, who has been tasked with cutting wasteful government spending and deregulating the economy.

Musk has set an ambitious target of cutting federal spending by $500 billion per year from a total budget of $6.8 trillion, which would effectively reduce the $1.9 trillion budget deficit by half. The ambition has been met with scepticism by some experts.

Musk and his co-head Vivek Ramaswamy have already identified several areas where they believe they can make significant reductions. One tactic is to require federal employees to attend the office five days a week, which they expect will prompt a wave of resignations.

More radical steps include plans to close the Department of Education and the Corporation for Public Broadcasting, and cut federal grants to international organisations and Planned Parenthood. On the campaign trail last year, Ramaswamy even said he would try to eliminate the FBI and the Nuclear Regulatory Commission.

A mixed bag of global economic data

On the economic front, last week saw a mixed bag of data. The British Retail Consortium’s like-for-like sales monitor showed sales fell 3.4% year-on-year in November. However, this is likely due to the timing of Black Friday, which fell outside the survey period this year.

In the U.S., the Institute for Supply Management (ISM)’s services index was also disappointing, with a worse-than-expected slowdown in activity. However, the ISM Services Prices Paid Index remained elevated, suggesting that inflation may still be a concern.

In Asia, an extraordinary event rocked the South Korean market. President Yoon Suk Yeol’s decision to impose martial law came seemingly out of the blue. Initially, the military followed the ruling, but lawmakers rushed to overturn the order. The president survived an impeachment vote on Saturday after too few lawmakers participated. The Korean market has been volatile, with the Korea Composite Stock Price Index falling since the turmoil began.

Are things looking up for luxury goods?

Luxury goods benefitted from lockdown as consumers had limited opportunities to spend money, but since the economy reopened, momentum has gradually stalled. The sector has been under pressure this year, with LVMH Moët Hennessy Louis Vuitton (LVMH)’s share price down 30% from its peak. However, the company’s valuation now looks very attractive.

Furthermore, the macro environment is turning more favourable. Weak Chinese consumption is now the base case, meaning any recovery will be treated positively. Consumer goods are exposed to tariffs; however, with a plant in Texas, LVMH should not be in the Trump administration’s firing line.

Crucially, LVMH will stick religiously to its mantra of never discounting luxury goods. With a solid balance sheet, the company may be able to take advantage of weakness elsewhere in the sector, with some opportunistic mergers and acquisitions activity.

What’s happening in the semiconductor industry?

The semiconductor sector has also been in the spotlight, with Intel’s leadership change and the announcement of new export controls.

Intel’s CEO, Pat Gelsinger, has announced his retirement after a four-year tenure in which he has tried to turn around the company’s fortunes. The change has unsettled investors in the company, and the broader sector, where strategic clarity would be welcomed due to the capital-intensive nature of the business.

A big question is what this means for the loss-making foundry business? The U.S. CHIPS Act provides funding to support the domestic production of semiconductors – however, funding is reliant upon Intel maintaining a 50% stake in the business. A search is on for Helsinger’s replacement. On the plus side, there were some impressive additions to the Intel board.

Marvell Technology’s earnings were strong, with revenue accelerating in the third quarter. The company’s data centre business revenue grew 98% year-on-year, and 25% quarter-on-quarter. Marvell is a beneficiary of the densification of the data centre, as it helps companies increase the energy intensity (density) of their servers. It also has a custom silicon business, which designs chips to meet the specific needs of a customer or application, which is expected to drive growth.

Synopsys, which provides design services to chipmakers, tends to be a strong performer when the industry enters its periodic slowdowns, and is a less cyclical part of the semiconductor value chain. While it issued good results, its shares fell due to the cautious guidance.

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

Alex Kitteringham

11^th December 2024

Please see the below daily update article from EPIC Investment Partners received this morning 09/12/2024:

The ECB meeting (Thu), US CPI (Wed) and PPI (Thu), and China trade data (Tue) all feature this week, and China’s policy makers meet at the closed door Central Economic Work Conference (Wed-Thu) Other events to watch for include the BoE’s Ramsden speech on financial stability, and the ECB President Lagarde’s news conference following the ECB meeting, where a 25bps cut is fully priced in.  

Last week, geopolitical tensions and economic indicators dominated market sentiment, given the mixed signals from the US labour market through the week. The yield on the 10-year UST fell for the third consecutive week to 4.15%, while the S&P Index gained a further 0.96%. Meanwhile, the DXY Index gained 0.30%, and Brent crude fell 2.50% to $71.12pb. OPEC+ delayed its planned oil output increases until April 2025 and extended full cut unwinding to the end of 2026, responding to weak global demand and increasing non-OPEC production. 

In the US, November nonfarm payrolls increased by 227,000, slightly above expectations, with a two-month net revision adding 56,000 jobs. The unemployment rate rose to 4.2%, and average hourly earnings increased 4.0%yoy. The household survey showed job losses of 335,000, contrasting with the survey’s continued job growth. The Uni. of Michigan consumer sentiment rose in December to 74.0, with current conditions improving to 77.7, but year-ahead inflation expectations increased to 2.9%. Fed officials, including Bowman and Hammack, signalled caution about rate cuts, emphasising persistent inflation risks and suggesting the Fed is near a neutral monetary policy stance. With upcoming CPI, PPI, and retail sales data before the December 18 FOMC decision, the market anticipates a potentially hawkish rate cut. The upcoming FOMC statement and dot plot will therefore be critical in determining potential monetary policy pauses, possibly as early as the January meeting. 

Elsewhere, China’s markets rose last week on potential 2025 policy support. The government is favouring domestic industries through new procurement rules and tech restrictions. This morning’s China CPI figure showed the nation’s prices rose at a slower rate (0.2%yoy) in November, driven by declining fresh food prices and ongoing factory deflation. PPI showed some recovery to -2.5% (from -2.9%) supported by a mild improvement in business activity last month. This week features two key events: Premier Li’s “1+10” dialogue with international organisations and the Central Economic Work Conference, where leaders will set 2025 economic targets, aiming for ~5% growth amid US trade tensions. Full details will not be public until March’s parliamentary session. 

The global economy is expected to grow steadily at 3.2% this year and similar rates in 2025 and 2026, according to the OECD, with lower inflation, job growth, and potential interest rate cuts supporting this outlook. This projection depends on avoiding protectionist policies that could disrupt global trade. 

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

09/12/2024

Please see below, EPIC Investment Partners’ Daily Update which is focused on the potential economic impacts of US trade tariffs on Canada and Mexico. Received this morning – 06/12/2024

Yesterday, OPEC+ postponed plans to increase oil production, citing weaker-than-expected demand and rising output from non-OPEC countries. This cautious decision highlights the cartel’s focus on stabilising global supply and prices. However, this fragile balance faces a looming threat: a proposed 25% tariff on Canadian and Mexican oil imports. Such a policy could disrupt trade flows and reverberate across the U.S. refining sector and the broader energy market. 

Canada and Mexico supply the heavy crude that U.S. refineries are designed to process. The lighter crude from U.S. shale fields, despite its abundance, cannot replace these imports without costly refinery upgrades. A 25% tariff would make Canadian and Mexican oil economically unviable, forcing refiners to seek alternatives. This shortfall positions OPEC, with its reserves of heavy crude and spare production capacity, to step in and fill the gap. 

OPEC’s ability to swiftly adjust output offers a strategic opportunity. By supplying the U.S. market, the cartel could expand its market share and deepen its influence. However, a measured production increase might stabilise prices, inadvertently supporting U.S. shale producers, whose break-even costs remain above $60 per barrel. Keeping prices at this level would help shale remain competitive, undermining OPEC’s efforts to dominate. 

A more aggressive strategy would involve ramping up production to drive prices below $60. This move could undermine the profitability of U.S. shale while weakening Canadian and Mexican exports already burdened by tariffs. By leveraging its low production costs, OPEC could consolidate its dominance and increase revenue through higher volumes, despite lower prices. 

For U.S. refiners, the scenario offers short-term relief from lower input costs but raises longer-term concerns. Greater reliance on OPEC would undermine energy independence and increase exposure to geopolitical risks. Meanwhile, the broader market could experience heightened volatility, disrupted trade flows, and reduced investment in new production capacity.  

Tariffs on imports from Canada and Mexico may appear narrowly targeted, but their consequences could ripple through the global economy in ways markets have yet to fully grasp. While many expect tariffs to stoke inflation, we believe the opposite is more likely. Weaker global growth, disrupted trade flows, and a potential flood of oil from OPEC could exert downward pressure on energy costs, dragging inflation lower rather than higher. This dynamic may prompt the Federal Reserve to act faster than markets currently anticipate, easing monetary policy in response to softer price pressures and weakening demand. In an interconnected global economy, knee jerk assumptions about inflation risk oversimplifying the complexities at play. Measures intended to protect domestic industries could, paradoxically, accelerate a global slowdown, reshaping expectations for growth, inflation, and the trajectory of U.S. interest rates. 

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

Alex Kitteringham

6^th December 2024

Please see this week’s Markets in a Minute update below from Brewin Dolphin, received yesterday afternoon – 03/12/2024.

Last week was Thanksgiving weekend in the U.S. This important holiday tends to bring a gentle slowdown in activity. American markets were closed on Thursday and had a shorter trading day on Friday, allowing many investors to take a long weekend.

The week was relatively quiet for markets due to the reduced liquidity, but one pocket of excitement came from France.

France’s challenging budget deficit

French Prime Minister Michel Barnier was on the sharp end of some fairly ominous comments from Marine Le Pen, leader of the National Rally party.

France is one of the major economies with a challenging budget deficit. Arguably, it’s not much worse than the UK’s deficit, and it’s tangibly better than America’s, but the combination of political and economic factors means the challenges are particularly pressing for France right now. Let’s unpick the theory behind its challenging situation.

The U.S. is assumed to benefit from the exorbitant privilege of hosting the world’s reserve currency. Generally speaking, this means other countries feel they must hold U.S. dollars for trade (and hold their reserves of U.S. dollars in U.S. assets, of which treasuries are the highest quality and most liquid). This required ownership of U.S. government bonds helps prevent yields from rising as much as they otherwise would.

Both the U.S. and the UK issue debt in their own exclusive currencies. This largely mitigates the risk of default. In extreme situations, these governments can print the money needed to pay bondholders if necessary. So, the risk for most developed countries isn’t that they can’t meet payments, but rather the consequences of doing so would be inflationary. This is why the period before the establishment of the euro saw a number of currency crises.

The Eurozone is now comprised of a group of countries that share a currency and must abide by rules to ensure the stability and efficacy of that currency. Theoretically, it means countries don’t have the option of the printing press to fall back on and would need to tighten their belts, borrow, and default on their bonds if tax revenues fall significantly short of expenditure. 

In practise, that’s what has happened. Greece was forced into a painful austerity programme and bondholders suffered losses when the country found itself unable to balance its budget.

This hasn’t always been the case. Subsequent financially stressful periods have seen the European Central Bank support Eurozone bond markets in a way that, arguably, supports the weaker members at the collective expense of all.

This comes at a time when the traditional powerhouses of French politics, the centre-left and centre-right, have been losing ground politically.

President Emmanuel Macron held a surprise legislative election in June and July, which saw his party lose a lot of seats. Indeed, it was only dark electoral arts (standing down the more centrist candidates to avoid splitting the vote) that prevented the more extreme parties from achieving a majority. In the absence of a clear winner, Macron’s Ensemble coalition formed a minority government with Barnier as prime minister.

Making moves to reduce borrowing

It’s from this perilous position Barnier attempts to deal with the issues of the day: a 5%+ budget deficit. France now breaks the European Union (EU)’s ‘excessive deficit’ monitoring threshold and must take steps to reduce its borrowing.

Prime Minister Barnier had promised to bring the deficit back to 5% of gross domestic product by the end of 2025, and within the 3% threshold by 2029, in accordance with ‘excessive deficit’ procedure. However, many are sceptical that he’ll be able to achieve this.

A major hindrance will be the political circumstances – while the UK government has a large majority to force through unpopular decisions, France’s minority government needs the support of its political adversaries to stay in power, a situation that seems doomed to fail.

Despite the diminished state of this government, Barnier can force through legislation without a vote. However, doing so effectively challenges his fellow lawmakers to pass a vote of no confidence in the government, effectively triggering a new election. 

In negotiations so far, Barnier has conceded ground by cancelling planned increases in energy tariffs, but the National Rally party wants further concessions. This will make it harder to get back within the acceptable ranges of the demanding ‘excessive deficit’ procedure – as will the prospect of further tariffs on exports to the U.S.

Who will win in a trade spat?

Tariffs introduced by the U.S. would certainly be met by retaliatory measures from trading partners such as the EU, but a good shorthand for the eventual victor in a trade spat is to look at trade balances and determine who has most to lose.

If a country runs a trade deficit (like the U.S. is currently), it spends more on imports than it earns from exports – so if both imports and exports were subject to tariffs, the deficit country would be better off.

The U.S. generally has a trade deficit with most trading partners, which partly explains why President-elect Donald Trump is so disposed towards tariffs. However, that’s a gross over-simplification and in practice, the beneficiary of trade isn’t necessarily the party that makes the most sales.

While the revenue from tariffs, and the benefits of reduced trade, will also accrue to the biggest importers, the burden of them may still be more complicated. For example, if the goods are mobile and generic, a tariff will likely make it harder for an exporter to compete with international peers, and they will lose sales.

In contrast, if a product can’t be widely produced, is really important, and can only be obtained from a specific source, then a tariff on that source raises prices for customers with less impact on the seller.

Some goods can be considered strategically important because they are used in defence or high technology systems. A recent study found that Europe sold 32 strategically important goods to the U.S. that it would be difficult to transition away from, while the U.S. sold just eight such goods back.

It still seems safe to assume that Europe has a relatively large amount to lose from a reduction in trade, but this does show how there can be costs to all parties. This is why free trade was considered, perhaps over-simplistically, to be a positive sum game that benefits all economies (if not everyone within those economies).

Will a sharp bond sell-off affect voters?

As the week ended, the standoff amongst French politicians intensified.

French assets sold off sharply as the political crisis deepened but were relatively stable towards the end of the week. Sharp selloffs in bonds (like the UK saw after the 2022 mini budget) will likely form a material test of populists’ ability to remain popular.

Whether the financial market’s reaction to this current tension in France is significant enough to become a consideration for voters remains to be seen. If Marine Le Pen is as good as her word, the beginning of this week may prove an important moment.

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

04/12/2024