Andrew’s Views

The final quarter of 2024 was marked by developments in many parts of the world, with the highly polarising US Presidential elections, following on the heels of the UK’s highly anticipated Autumn Budget. Throughout the last three months of 2024 we saw a shift in many global economic conditions, with the direction of interest rates and inflation still the major focus for many. Whilst rates continued to decline throughout the quarter in the UK, US and Europe, a more cautious tone on the pace of rate cuts in the US dampened market sentiment, resulting in several global markets taking different paths, with the dollar rallying, bond markets weakening and global equities having significantly differing results.

Overseas Equity Markets

With Trump winning his second term in the White House as well as retaking control of the Senate and House of Representatives, the question now is around how much of the tax and spend policies outlined in his campaign will now end up becoming law? The US market and dollar rallied, along with risk assets like Bitcoin, on the expectation of increased government spending under the new administration, a cut to corporate taxes and deregulation of the financial industry. However, Trump’s threat to slap tariffs of as much of 20% on imported goods from the UK and Europe, together with tariffs of 60% on Chinese imports, makes for a more challenging global dynamic with markets outside of the US mostly weakening in the final months of the year.

European equities faced challenges amid an ongoing economic slowdown in Germany, which as an export driven economy continues to grapple with the onslaught of heavily subsidised cheap electric vehicles from China, denting its market share of the automotive industry and hitting profitability, whilst also still feeling the effects of the end of cheap Russian natural gas. Political uncertainties in France also added to the uncertainty. In Asia, Japanese markets remained resilient, supported by corporate reforms and favourable monetary policy, while Chinese equities were mixed, reflecting concerns over the ongoing instability on the property market despite major government stimulus efforts.

The UK Budget and Tax Changes

In the UK, the Budget was a focal point for investors that were keen to understand the implications of any changes on their personal finances. The government prioritised infrastructure spending and public services, opting to fund these initiatives through increased borrowing rather than significant tax hikes, so for most stock market investors, the Budget was less impactful than some had feared. We saw a modest increase in the capital gains tax (CGT) rates, but this was less substantial than some had anticipated, signalling the government’s intent to address fiscal challenges without placing undue burden on investors. Equity markets responded cautiously, with sectors linked to government spending, such as construction and infrastructure, experiencing modest gains in the immediate aftermath.

In the bond market, Gilt prices weakened and yields, which are inversely correlated with price, ticked higher, reacting to the idea of increased borrowing. This contrasted with bonds in Europe, which remained relatively steady, with expectations of continued accommodative monetary policy (further rate cuts), amid sluggish economic growth.

Other Viewpoints

Cash (Savings Accounts) – We expect interest rates to fall over the next few years but good rates are still available right now. Instant access rates are available from 4.5% but fixed term savings are only slightly higher as banks don’t want to tie themselves into providing guaranteed higher rates in the future when they expect interest rates to be lower themselves.

 Fixed Interests – Due to the expected fall in interest rates a rise in the value of Corporate Bonds has largely already been priced in, so finding good value in this market is becoming increasing difficult. However, government bonds are still available with a guaranteed return being sold at a discount to their maturity value, so there are some good deals to be had in this area.

 Global Shares – We expect the global economy to continue to grow in the short and medium term. We also expect AI to start having an impact on corporate profits in the coming years, which would raise values somewhat. I expect the global equity market to continue to be the strongest area for growth in the coming years.

 UK Shares – We expect Labour to be successful in boosting growth over the full term of this government which should have a positive effect on the UK stock market. The UK is also heavily undervalued compared to its US counterpart, meaning it is still possible to buy shares that represent good value compared to their earning which is becoming increasingly difficult to do in the US. Defensive shares that pay good dividends have performed exceptionally well for the UK over the past 4 years or so and we see no reason for that to continue, but I am less convinced of the argument for UK growth shares.

US Shares – AI companies are likely to be the big thing in the US again this year, however, the valuations of those companies that are heavily invested in AI seem to be so over the top that it is difficult to make an argument for their continued growth. Nevertheless, with Trump now in charge for another term, someone who loves de-regulation and cutting corporate taxes, we are likely to see strong growth from this market over the next 12 months.

European Shares – With the potential for tariffs coming from Trump for most of the EU I think that short term this will have a negative affect on the European markets. Also, Germany, Europe’s biggest economy, continuing to struggle does not make the rest of the Eurozone seem particularly attractive for the next few months.

 Asian Shares – Asian shares are about a lot more than just China and Japan, but they seem to dominate the headlines. China is still struggling with its over valued housing stock and deflation still seems to be a risk, although the market seems to like the direction the authorities are moving in. Whilst in Japan the market looks very good, again largely in part to the actions taken by the authorities, with growth looking likely for the future and also seems quite inexpensive looking at individual companies, so we are positive in our outlook for Asia.

 Emerging Markets – I’m almost getting bored saying this: Emerging markets are very closely linked to commodity prices and we don’t expect to see much growth from that sector in the short term. Whilst the news is mainly about the US the emerging economies don’t get much of a look in.