Key Highlights
The decisive victory of Donald Trump in the US presidential election has fuelled
optimism in equity markets, driven by expectations of deregulation, tax cuts and a
pro-business agenda.
US Treasury yields fell to 4.2% post-election, diverging from inflationary expectations;
inflation is projected to rise to 3% in 2025.
Equity indices and cryptocurrencies surged, with Bitcoin nearing $100,000,
supported by market confidence and the US dollar's safe-haven appeal.
The UK faces economic headwinds, with inflation rising to 2.3% and GDP growth
slowing to 0.1%, accompanied by concerns over fiscal policies and borrowing plans.
In Europe, industrial challenges persist, with automotive profits plummeting and
unemployment has ticked higher. Though sectors like pharmaceuticals and energy
infrastructure provide brig ht spots.
Japan's equity rally slowed after meeting targets, and further yen weakness is
expected as inflationary and economic pressures persist.
China's modest stimulus measures aim to stabilise the real estate sector but are
viewed as insufficient to signif icantly boost equity markets.
Commodities stabilised, with gold at $2,600 per ounce and oil at $72 per barrel, as
geopolitical and supply-demand factors balance the outlook.
Portfolio adjustments inc luded reducing Japanese equ ity exposure after meeting
targets, reallocating profits to cash, and maintaining strong US allocations ahead of
2025 opportunities.
November proved a busy month with upwardly mobile stock markets and a resounding victory for Donald Trump in the US presidential election. Geopolitics continues to cast a shadow across optimistic progress in equity markets, although we travel hopefully that a new regime in Washington might just secure a peace deal. What to make of it all and what do we see in prospect from a 2nd Trump presidency? We tackle these topics in some detail in the Investment Update that follows.
The light-hearted phrase “the future’s orange” is supported by a decisive Donald Trump victory in the key global election of the year. True to form, President Elect Trump has begun appointing staff well before he takes up residence at the White House,1600 Pennsylvania Avenue.
Markets celebrated the arrival of an openly pro-business President with some vigour seeing new highs across various equity indices and in the alternative asset class crypto currency. US Treasury yields have fallen from 4.4% to 4.2% since the election, which is counter intuitive and certainly not what was forecast – perhaps ‘America First’ policies will prove less inflationary than consensus anticipate. We do envisage inflation figures beginning with a 3 and not a 2 during 2025. Firmer PCE inflation (the inflation recorded between companies) is a leading indicator to consumer prices, albeit with a lagged effect.
The US dollar surged higher based on safe-haven status in a geopolitically uncertain world, but towards the month end a topping pattern in the price corresponded with a ceasefire in Lebanon and hope that Presidential accord between Russia and America can help resolve the grinding war in Ukraine.
We offer a framework for what we anticipate is likely to emerge from a second Trump presidency.
Domestically, a "hostile takeover" approach, led by loyalists such as Elon Musk and Vivek Ramaswamy in a new Department of Government Efficiency has begun to take clear shape. Major efforts include purging the "deep state" and emphasising efficiency, deregulation and economic strength. Economically, deregulation and reduced taxes have been proposed with the aim of stimulating businesses and markets. Support for domestic industries and technology through onshoring and friendshoring are planned to reduce dependence on foreign adversaries, however there is potential for some inflationary rebound linked with this approach. AI and industrial policies are likely to be prioritised over environmental or social concerns, whereas immigration and healthcare reforms will see strong interventions. Mr Scott Bessent, the proposed Treasury Secretary, will target a “3-3-3” policy; 3% real GDP growth, 3 million more barrels of oil production per day and 3% budget deficit pose challenging objectives – which the markets certainly applaud. Immigration enforcement and radical healthcare reforms under figures like Robert F Kennedy Jr are in prospect.
The ‘America First’ mantra, underpinned by tariffs; notably on China, and lukewarm support for a “socialist Europe” is in prospect. President Trump’s record on instigating foreign wars is significantly more dovish than many former presidents.
Set against a backdrop of a slowing global economy where Europe and China particularly delivered anaemic growth during 2024, the UK economy appears to be returning to a 1970s model. The United States of America stands head and shoulders higher in terms of pure delivery and reinforces our asset allocation strategies since we launched the business.
At home in the UK the picture looks less rosy. We cannot help but feel reminded by Winston Churchill’s immortal words: “For a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle”. The inflation rate in the United Kingdom increased to 2.3% from 1.7% in September. In the third quarter 2024, GDP increased by 0.1%, which was slower than the 0.5% growth in the previous quarter. The Bank of England left interest rates on hold, pointing to sticky inflation. Bond investors are concerned that Chancellor Rachel Reeves’s plans to increase borrowing to boost investments will fuel inflation, limiting the Bank of England's ability to cut interest rates, shown in the chart below.
After a punishing budget we note as important that private sector output shrank for the first time in over a year. Higher employer costs announced by Mrs Reeves, the Chancellor, have seen an early wave of job cuts and expansion plans put on hold. Burdensome green policies have forced closures by Ford and Vauxhall motors with corresponding links to higher benefit claims yet a shrinking taxation base. A return to policies last seen 50-years ago appears in prospect as Labour’s growth ambitions have failed to gain momentum so far. The UK 10-year yield climbed to 4.53% mid-month, the highest since November 2023.
We live in hope but are not inclined to bolster UK allocations further at the point of writing.
Europe also offers a mixed backdrop, with major industries in dominant economies such as Germany proving weak. For example, VW profits slump 64%, Audi slump 91%, BMW slump 84% and Mecedes-Benz 54%. Unemployment has ticked higher. Whilst the absence of a robust technology sector weighs heavy, there are some bright spots, for example, Novo Nordisk remains an appealing beacon for pharmaceuticals, and Siemens Energy has benefitted enormously from the global need to build efficient energy infrastructures to support power hungry data centres – its share price performance outstripping the mighty Nvidia. Lower rates and perhaps some forms of quantitative easing could well be considered by the European Central Bank.
Japan’s stock market has delivered a very good run for investors. That said, and as indicated here last month, we believe the best growth has been secured. We also anticipate further yen weakness, as the Bank of Japan faces a policy trilemma; balancing inflation, currency stability, whilst fostering economic growth. That said, we remain positively disposed to Japan which is in a notably stronger position under the policy stewardship of Mr Ueda at the BOJ.
Regular readers will already know about our mild scepticism around the so-called stimulus bazooka applied to the Chinese economy by the People’s Bank of China. The scale is seen as insufficient to shake an economy the size of China’s back to robust health. Analysts likened the package of measures akin to “taking chop sticks to a gun fight”. That said, we also note regional measure are being quietly rolled out to provide effective bailouts to real estate developer projects which are bankrupt. This will help of course, and debt relief is essential, however there is likely to be limited pass-through to Chinese equity markets where around 50% of recent gains have been surrendered already.
The emerging world, whilst generally not in recession does find forward progress difficult with dollar strength at such lofty levels.
The gold price took a breather during November from its upward surge this year, coming to rest around $2600 per ounce. Silver has likewise peaked for now. Bitcoin, often referred to as digital gold, leapt higher heading towards $100,000. Supply and demand, a protection against inflation and currency debasement are common drivers, albeit crypto currency adoption and regulatory approvals remain in their early life cycle. The oil price, around $72 a barrel, offers a positive stimulus to economies and could well fall lower based on OPEC and American production forecasts. Copper, the barometer for a modern electrified economy, has steadied on the US election outcome but remains lower overall as non-US economies are weak. An important distinction is that pricing of commodities reflects present supply and demand whereas pricing for equities discounts future demand to today’s price. In practice, for example, this can explain why the price of uranium is flat versus the share price of atomic energy firms which have seen a sharp rise.
Clients will have noted activity on their accounts during November as we mildly adjusted risk lower. After a good run, Japanese equities met our price targets and have since consolidated sideways. Consequently, we have taken profits and trimmed our positions back to a neutral weight. Profits have been reallocated to cash as other major markets remain less appealing and, in the US, we already hold a strong allocation but continue to enjoy strong growth. Performance across the range of portfolios has been strong this year in absolute and relative terms. We look forward to 2025 with enthusiasm for recovery in global economies and for stimulative policy from a dynamic President Trump-led administration in America. We anticipate further liquidity and broadly supportive policy which will be lapped up by risk assets. We also note today’s equity valuations are discounting hefty earnings growth in 2025, aided by GDP expansion and corporate tax cuts. Meanwhile, we continue to enjoy the stock market party but have positioned ourselves a little closer to the door.
We wish clients and readers a very Merry Christmas. We look forward to serving you in 2025.
Written by the Alpha Beta Partners Investment Team.
All sources Bloomberg unless otherwise stated.