General Markets
This year has been characterised with positive outcomes for the equity markets. Inflation has largely reduced to near target levels and companies demonstrated resilient growth and improving corporate profits.** That said, this year hasn’t been without its pockets of volatility and spooked markets.
These positive outcomes helped central banks to initiate a global interest rate cutting cycle in the latter half of the year. The European Central Bank was the first to start the cycle with two 0.5% interest rate reductions. The Bank of England remained more cautious with a cut – pause – cut approach with high wage growth remaining a concern. In the US, the Federal Reserve started later than Europe and the UK but did so with a more aggressive initial 0.50% cut followed with a further 0.25% cut in November. The Bank of Japan has been an outlier, having raised rates by 0.25% in July.
Artificial Intelligence (AI) has also been an incredible driver of returns for the US markets with NVIDIA achieving such capital size it now represents nearly 5% of the MSCI World Index alone! It is expected by many fund houses that AI will continue to fuel growth but instead of just concentrating on the main players now, there will be a ripple effect as companies incorporate AI into their businesses which will spark new opportunities and improvements in productivity and efficiencies.++
Economies outside of the US haven’t been able to achieve the combination of strong growth alongside reduced inflation. Low levels of productivity growth and a weak manufacturing sector have dampened a rebound for Europe where economies largely remain “in the slow lane” **. This does mean that valuations for European equities are cheaper which could offer attractive opportunities for investors who are willing to remain in the markets for the longer term.
The UK has managed subdued GDP growth and the UK Consumer Price Index has moved closer to the Bank of England target of 2% but, as mentioned above, high wage growth has meant the BoE have been more cautious overall.
This, with mixed messages from the newly formed Labour Government about the state of the UK balance sheet, has stifled consumer and corporate demand which resulted in a stuttering UK stock market with corporate earnings struggling to gain any positive momentum.++
Fixed Interest
Bond markets have been turbulent as rate expectations have swung violently over the course of the last 12 months. At the end of 2023, markets were optimistically predicting an avalanche of rate cuts but this quickly swung to maximum pessimism in early 2024.
As we’ve approached the end of this year, markets have priced out a number of rate cuts believing that higher deficits and government spending are more inflationary – leading to central banks being more cautious to cut rates. ++
There are two sides to bonds however and current yields still look appealing for the asset class. The broad view is that this will continue to be the case going forward – for both government and corporate bonds.
Geopolitics and risk
We have to continue to recognize the ongoing war between Russia and Ukraine as well as the humanitarian crisis which is spreading through the Middle East with no obvious end in sight. Investors are still concerned over the secondary issues of commodity prices and how these may effect inflation going forward but first and foremost recognize the devasting impact the conflicts have on those societies both now and for future generations.
Politics can create another source of concern for markets. Much of the world went to the polls this year and the majority of those elections saw the incumbents lose. This can be seen as an indicator that the electorate aren’t as buoyant or resilient as the markets and tried to change governments to do something about it.
The US was by far the most prominent election with the re-election of Donald Trump. We at Fairey Associates recognise has been a concern for some of you since the election result in November so lets address the elephant in the room as best we can.
What could Donald Trump’s re-election mean for global markets?
The US elections in November have given the Republican party a clean sweep of the Presidency and both houses of congress. The initial reaction was a surge in stock prices with expectations of a higher growth economy, lower corporation taxes and deregulation. ++
The truth is, we are very much in a period of wait and see as to how many of the promises made on the campaign trail end up being implemented – either in full or scaled down versions. Realistically the Trump administration won’t be able to implement everything promised on day one (or even one year) and it will take some time to work through congress – even with both houses under republican control.
That said, many fund houses are expecting for some tariffs to be implemented (mainly against those regions where US has a high trade deficit such as China and Mexico). Add in the other themes of onshoring of manufacturing, reducing immigration (which will increase the labour costs in the newly created onshore manufacturing plants) and increasing debt ceilings this means that renewed inflation is seen as a very real risk – but to what degree is still speculative.
What does this mean for our portfolios?
The Fairey Associates Investment Committee are confident that our portfolios are in a strong position to capture the upside in the markets where growth is still forecast by using diversification across a range of regions globally both via equities and fixed interest holdings.
Fund houses are forecasting overall growth globally although some regions are thought to have greater growth prospects than others. As has now become the new normal, continued volatility in the markets is inevitable as new governments implement their policies and markets react - with or without favour.
References
** HSBC 2025 Outlook
++ Royal London Asset Management 2025 Outlook
Risk Warnings
This year has been characterised with positive outcomes for the equity markets. Inflation has largely reduced to near target levels and companies demonstrated resilient growth and improving corporate profits.** That said, this year hasn’t been without its pockets of volatility and spooked markets.
These positive outcomes helped central banks to initiate a global interest rate cutting cycle in the latter half of the year. The European Central Bank was the first to start the cycle with two 0.5% interest rate reductions. The Bank of England remained more cautious with a cut – pause – cut approach with high wage growth remaining a concern. In the US, the Federal Reserve started later than Europe and the UK but did so with a more aggressive initial 0.50% cut followed with a further 0.25% cut in November. The Bank of Japan has been an outlier, having raised rates by 0.25% in July.
Artificial Intelligence (AI) has also been an incredible driver of returns for the US markets with NVIDIA achieving such capital size it now represents nearly 5% of the MSCI World Index alone! It is expected by many fund houses that AI will continue to fuel growth but instead of just concentrating on the main players now, there will be a ripple effect as companies incorporate AI into their businesses which will spark new opportunities and improvements in productivity and efficiencies.++
Economies outside of the US haven’t been able to achieve the combination of strong growth alongside reduced inflation. Low levels of productivity growth and a weak manufacturing sector have dampened a rebound for Europe where economies largely remain “in the slow lane” **. This does mean that valuations for European equities are cheaper which could offer attractive opportunities for investors who are willing to remain in the markets for the longer term.
The UK has managed subdued GDP growth and the UK Consumer Price Index has moved closer to the Bank of England target of 2% but, as mentioned above, high wage growth has meant the BoE have been more cautious overall.
This, with mixed messages from the newly formed Labour Government about the state of the UK balance sheet, has stifled consumer and corporate demand which resulted in a stuttering UK stock market with corporate earnings struggling to gain any positive momentum.++
Fixed Interest
Bond markets have been turbulent as rate expectations have swung violently over the course of the last 12 months. At the end of 2023, markets were optimistically predicting an avalanche of rate cuts but this quickly swung to maximum pessimism in early 2024.
As we’ve approached the end of this year, markets have priced out a number of rate cuts believing that higher deficits and government spending are more inflationary – leading to central banks being more cautious to cut rates. ++
There are two sides to bonds however and current yields still look appealing for the asset class. The broad view is that this will continue to be the case going forward – for both government and corporate bonds.
Geopolitics and risk
We have to continue to recognize the ongoing war between Russia and Ukraine as well as the humanitarian crisis which is spreading through the Middle East with no obvious end in sight. Investors are still concerned over the secondary issues of commodity prices and how these may effect inflation going forward but first and foremost recognize the devasting impact the conflicts have on those societies both now and for future generations.
Politics can create another source of concern for markets. Much of the world went to the polls this year and the majority of those elections saw the incumbents lose. This can be seen as an indicator that the electorate aren’t as buoyant or resilient as the markets and tried to change governments to do something about it.
The US was by far the most prominent election with the re-election of Donald Trump. We at Fairey Associates recognise has been a concern for some of you since the election result in November so lets address the elephant in the room as best we can.
What could Donald Trump’s re-election mean for global markets?
The US elections in November have given the Republican party a clean sweep of the Presidency and both houses of congress. The initial reaction was a surge in stock prices with expectations of a higher growth economy, lower corporation taxes and deregulation. ++
The truth is, we are very much in a period of wait and see as to how many of the promises made on the campaign trail end up being implemented – either in full or scaled down versions. Realistically the Trump administration won’t be able to implement everything promised on day one (or even one year) and it will take some time to work through congress – even with both houses under republican control.
That said, many fund houses are expecting for some tariffs to be implemented (mainly against those regions where US has a high trade deficit such as China and Mexico). Add in the other themes of onshoring of manufacturing, reducing immigration (which will increase the labour costs in the newly created onshore manufacturing plants) and increasing debt ceilings this means that renewed inflation is seen as a very real risk – but to what degree is still speculative.
What does this mean for our portfolios?
The Fairey Associates Investment Committee are confident that our portfolios are in a strong position to capture the upside in the markets where growth is still forecast by using diversification across a range of regions globally both via equities and fixed interest holdings.
Fund houses are forecasting overall growth globally although some regions are thought to have greater growth prospects than others. As has now become the new normal, continued volatility in the markets is inevitable as new governments implement their policies and markets react - with or without favour.
References
** HSBC 2025 Outlook
++ Royal London Asset Management 2025 Outlook
Risk Warnings
- The value of an investment and the income from it could go down as well as up.
- All investing is subject to risk, including the possible loss of the money you invest.
- Past performance is not a reliable indicator of future results.
- Diversification does not ensure a profit or protect against a loss.
- Please remember that all investments involve some risk. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income
- This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue & Customs practice as at 2nd January 2024. You are recommended to seek competent professional advice before taking any action.
