Chris Robinson, MPS Investment Director, Premier Miton Investors, considers the market and economic landscape, ahead of the tump presidency. So, is it time to take some profits off the table?
Interest rate cuts, lower levels of inflation and a new president have dominated recent headlines. With most electorates showing their disdain for incumbent ruling parties this year, it may come as a relief to investors that to the end of November, developed world equities (FTSE All-World Index) are up over 20% for the year and over 7% in the last three turbulent months of geopolitics.
For the US, ‘Trumponomics’ is back, bigger than it was before. Well, that’s the rhetoric the market has followed so far with the US stock market continuing to rally, and encouragingly outside of the traditional mega caps that have driven the market for the last few years. It appears the US growth engine continues to roar, and when consumers feel positive, they will spend. The earnings growth for the US in 2025 is expected to be measured in double digits and when combined with lower expected interest rates, it’s no surprise this market has enjoyed its own “Santa rally”.
Trump has already started to play the tariff cards before he has even arrived at the Presidential table. His initial announcement has focused on levying trade measures against the Emerging Markets, Canada and South America. This of course brings worries from our perspective. Anything being taxed on its way into the US will inflate prices. It’s quite clear that analysts are finding it difficult to judge what impact this may have. In the short term one thing has been clear, inventory build is high. US companies are importing goods and raw materials ahead of these tariffs to keep cost pressures down.
In the UK, its heavy reliance on US consumption benefitted returns, as the FTSE 100 Index rallied 2.6% during November, with the FTSE 250 Index not far behind it up just over 2%. The UK economic data during the month showed slowing manufacturing but a resilient services sector, although it is worth noting the UK economy is heavily focused on services. The recent Budget appears to have taken some wind out of the sails of corporate outlooks due to increased employee related costs. However consumer sentiment has so far remained resilient, something we are watching closely.
Europe has emerged as the sick market of the World, with the Eurostoxx 50 Index down -2.7% in November and over -6.2% over six months. Worries around US tariffs, uncertainty of Trump’s support for Russia/Ukraine, alongside political instability in both France and Germany have weighed on sentiment. The announcement of German elections in February have just recently been topped off with the resignation of the French Prime Minister after the failure to get his budget through the National Assembly. European bond yields had been on their way down across the continent, yet it is notable that French government bond yields have bucked this trend. It did amuse us to read that Greek debt was now yielding less than that of France – a considerable turnaround from the 2012 European debt crisis. This has been driven more by a positive Greek economic backdrop than a terrible situation for France (so far). We have been pleased to remain underweight in our European position ahead of this which has been reaffirmed on the back of the recent uncertainty.
A region that continues to show a lower correlation to other markets is Japan. Whilst it has lost some momentum following the summer, it bounced in November as the Yen weakened against the dollar. This provides a positive feedthrough to Japanese companies selling goods overseas. However, comments on the last weekend of the month from the Bank of Japan Governor Kazuo Ueda, focusing on the need for rate hikes in 2025, dented market sentiment. Wage negotiations across unions, combined with higher prices in general, are causing some steady inflation issues the central bank wishes to address. We have been mindful to take some profits here while remaining constructive on the long-term governance shifts that will improve shareholder returns in this market.
China has been the main surprise this year. Having been unloved for much of the year, this sleeping dragon was stirred by a more constructive and market friendly stance taken by their central bank and ruling party. So far this year we have seen the introduction of market reforms, interest rate cuts and the bazooka of a long-awaited government stimulus package. In combination with this we have also seen a strong run in the ever-evolving Indian market which has led to the Emerging markets performing strongly over recent months. However, dollar strength and US tariff worries continue to linger in the background. Despite the caution around the Russian and Ukraine conflict, it was Emerging Europe (FTSE Emerging Europe Index +4.5% in November) that has seen the greatest gains recently. It seems that the European periphery appears unaffected by the Trump trade while benefitting from resilient domestic demand as European rates continue their descent. It is positive to see the fundamentals of economic resilience being rewarded.
The hardy backdrop to markets has clearly fed through to fixed income markets. Corporate bonds love a steady environment with very few shocks. Corporate bonds have consequently rallied, so too government bonds with the UK and US 10-year government bonds performing well of late. We do not view this as investors seeking the haven status of government bonds by taking a more cautious stance. Instead, it is more a reflection that investors are keen to lock-in higher yields with rate cuts remaining in the offing.
Positive equity markets on the whole have provided a supportive environment for not only fixed income but also Bitcoin. Although we do not consider this an investable asset class from a portfolio context, it has just rallied to almost $100,000. Deregulation and US optimism are partly to blame, as well as the positive sentiment that US growth will feed through to the rest of the world. It really is becoming an alternative indicator to the risk on/off sentiment that drives market volatility in the short term. Its recent move reflects a key turning point in the outlook for risk taking and consequently the ability for a wider dispersion of returns within markets. It wouldn’t surprise us to see a rally in yields more broadly which could see some of the equity momentum start to fade in the US. This could be very positive for the rest of the world and specifically Emerging Markets.
It is too early to say whether Trump will truly enact all the changes that have been reported, but he is of course going to drive the hardest bargain at the start of negotiations, something we suspect we are currently seeing. For now, consumers are spending, the festive cheer is upon us and with low unemployment and wage inflation evident, it is hard to envisage anything but markets grinding higher to the end of the year. As for next year, we think we will see further moderation of the growth outlook. Taking some profits from risk assets after the gains of this year, feels like a prudent approach as we enter 2025.
Performance source: FE Analytics. Based on UK sterling, on a total return basis, to 30.11.2024. Past performance is not a reliable indicator of future returns.
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