The 'Trump trade' takes hold
US equities were buoyed by expectations that a business-friendly policy programme will lift growth, lower taxes and cut regulation, with the Republican party also gaining control of Congress. Concerns were raised, however, over the potential for further fiscal stimulus to reignite inflation and over plans for higher tariffs. Small-cap stocks outperformed strongly, rising 11.4% amid expectations that domestically exposed companies will benefit most, while cyclical sectors such as consumer discretionary, energy and financials also rose sharply. Asia and emerging markets came under pressure amid worries over potential trade tariffs, and the gold price gave back some of this year's spectacular gains.
Solid growth, easing policy
On the economic front, the US continued to grow at a solid pace. The Atlanta Fed's estimate for the fourth-quarter growth rate stood at 3.2%, above the 2.8% recorded in the third quarter. US annual inflation, as measured by the consumer price index, ticked up to 2.6% in October from 2.4% in September. As expected, the Federal Reserve cut interest rates by a further 0.25%, taking the federal funds rate down to 4.50–4.75%, noting that labour market conditions had generally eased but that inflation was still "somewhat elevated".
UK equities rose 2.6% over the month, recouping the losses suffered in the run-up to the October Budget. UK funds saw their first month of inflows since May 2021, breaking a 41-month streak of unrelenting net selling, and government bond yields stabilised following their recent move higher. Both factors added to the view that no major surprises in policy had emerged from the new Government's first Budget. Inflation rose slightly in October, with the CPI up 2.3% over the year, driven by higher energy bills. As expected, the Bank of England cut the base rate by a further 0.25% to 4.75%, concluding that the Budget was likely to boost both growth and inflation and that a "gradual approach" to removing policy restraint remained appropriate, leading most economists to rule out another cut in December.
UK takeover activity was back in the spotlight after a summer lull. Insurer Direct Line saw its share price soar after rejecting a bid from Aviva; waste management group Renewi received a new bid from Australia's Macquarie Asset Management; and AIM-listed pub and restaurant chain Loungers accepted a bid from private equity group Fortress at a 30% premium.
Political turmoil crosses the Channel
The UK has finally rid itself of the "Europe's most politically troubled economy" title, having handed it to the Eurozone, where the two largest economies are both experiencing political turmoil. The German coalition government collapsed after Chancellor Scholz sacked his finance minister and called a snap election, scheduled for February. The political melodrama in France also continued to play out following a disastrous election earlier in the year, which left an unworkable parliament divided into three roughly equal blocks. In the latest twist, newly appointed Prime Minister Michel Barnier resigned following a vote of no confidence, having been unable to obtain sufficient parliamentary support to pass a budget. The stalemate looks set to continue, with a lame-duck government in place until the next elections can be held in 2027. This has spooked the French bond market, where yields may soon offer a higher rate of interest than even Italy. Eurozone equities closed flat overall.
Asian and emerging market equities declined 1.0% but ended the month on a more optimistic note. The prospect of a second Trump presidency raised the risk of heightened political tensions over trade and technology; as part of his election campaign, Donald Trump pledged to impose tariffs of 60% or more on manufactured goods from China. Japanese equities finished the month with a slightly negative return, although the increased likelihood of a rate hike in December pushed the yen to a six-week high, boosting the return for a sterling-based investor to 1.8%. Semi-annual corporate results showed that share buybacks have continued to surge, confirming that the favourable valuation backdrop for Japanese companies remains in place.
A note from the desk
I am pleased to share our monthly update on market events. The overview seeks to summarise market movements together with our views and the rationale for the positioning of investments going forward. As always, should any aspect of this commentary prompt a question, we would welcome the conversation.
Martyn Charlwood · Managing Director
A favourable backdrop, with valuations the caveat
The fundamental backdrop for financial markets remains favourable. The global economy is growing and looks set to accelerate, central banks are cutting rates, while inflation is finally close to or at target.
Animal spirits in the US are alive and well. The positive expectation arising from Donald Trump's return to the White House is that he will usher in a new era of government efficiency, lower taxes and deregulation, bringing about a boom in the economy and corporate profits. However, the inflationary risks of these policies should not be discounted and, as a result, the potential for further interest rate cuts is likely to be less than current expectations. There are likely to be some bumps along the way, and in the short term there is potential for a pullback: US equities have had a phenomenal run, which has left valuations looking stretched.
Diversification into cheaper markets is an effective way of managing these risks. We believe performance will broaden out in 2025, as the combination of stronger growth and lower rates provides a catalyst for rotation. Technology has dominated performance over the past few years, but other sectors may be set to benefit from the changing macro environment, leading to less concentrated sector returns. Perhaps the greatest opportunity is in global small caps, trading at a multi-decade discount relative to their larger counterparts. Similarly, more stable politics in the UK and some cyclical improvement should improve sentiment at home, while fewer concerns over China should be more supportive for Asian and emerging markets.
US equities have had a phenomenal run, one that has left valuations looking stretched.
We remain constructive about markets in 2025 and see valuation opportunities in regions outside of the US, particularly in small caps and value stocks.
The United Kingdom
UK equities offer exposure to many high-quality companies trading at valuations significantly below global peers, together with a compelling income stream. Sector exposures in the UK are very different to other global markets: minimal exposure to technology, but greater exposure to cash-generative financials, energy and basic materials, along with high-quality consumer staples. This should prove beneficial if expectations for a sector rotation in 2025 prove correct.
Emerging markets
The US monetary policy outlook is likely to be most supportive for emerging markets, where equities are benefiting from stronger domestic demand and growth. The region has delivered positive performance after the end of a US rate-hike cycle in four of the past five cycles. Action by the US Fed also provides greater flexibility for the region to initiate its own policy easing cycle without fear of negative repercussions for its currencies.
China
Chinese policy is unambiguous in trying to engineer an equity market recovery, with the authorities throwing the kitchen sink at the economy. Whether these measures will translate into consumption, overall growth and a fix for the deeper structural issues remains to be seen, but it is hard to be bearish when both of the world's biggest economies are loosening monetary and fiscal policy simultaneously. A stronger China would further increase the attraction of emerging markets in general.
Bonds over cash
While equities remain our preferred asset class, the prospect of lower rates means that bonds should outperform cash. Bonds also provide diversification in the case of slower growth but will not protect portfolios from the possibility that inflation remains higher for longer, which remains our central view, with the exception of index-linked bonds. We are also mindful that the high level of fiscal deficits and outstanding public sector debt across major Western economies may well maintain upward pressure on yields for the foreseeable future.
Gold and commodities
Alternative assets such as gold and commodity stocks offer a valuable source of diversification, allowing us to hedge against inflation and other potential risks. Stimulus by China could exert further upward pressure on commodity prices. The combination of higher geopolitical risk, lower interest rates and strong central bank demand has created a highly favourable environment for gold, and our exposure to both physical bullion and gold mining shares has been a major contributor to outperformance versus benchmarks.
Capturing the upside, controlling the risk
Overall, we continue to manage investments in a manner that allows us to capture the upside in financial markets while also effectively controlling risk, to dampen volatility and smooth the path of returns.
Important information
This article is a marketing communication intended for general information only. It does not constitute personal advice, a recommendation, or an offer to buy or sell any investment. If you are unsure whether an investment is suitable for your circumstances, please seek personal advice.
Past performance is not a guide to future performance. The value of investments and any income from them can fall as well as rise. Capital values are at risk and not guaranteed. Forecasts and views expressed in this commentary represent our assessment at the time of writing and are subject to change.
To discuss how this commentary applies to your own portfolio, we would welcome a conversation.
Make an enquiry →