Investment Update: December 2024

INVESTMENT UPDATE DECEMBER

*all returns in local currency terms

Overview

Both headlines and markets were dominated by Donald Trump’s overwhelming victory in the US Presidential election. Although the precise details of his likely policies are still unclear, he is clearly thought to be business friendly and within that, whatever the final details are, these policies are certainly going to be based on ‘America first’. As such, we saw stock markets in the US rally significantly, and if there was any doubt about investors views on the likely impact on the domestic economy, these should be dispelled by looking at the domestically focused smaller company sector returns, with the S&P’s small company index up nearly 11% over the month. Perhaps unsurprisingly, European markets were more subdued, given that Europe is likely to be in the crosshairs of any import tariffs being imposed by the new US President.

Government bond yields, having risen significantly through October in anticipation of a Trump victory, fell back somewhat, having perhaps overestimated the inflationary impact of any future tariffs, although yields are still significantly higher than they were prior to October. However, this is probably as much to do with expectations for elevated future government borrowing levels as it is to do with inflation.

US

It is easy to understand the markets’ optimism over a Trump Presidency, as evidenced by both the rally in the stock market and dollar. Whatever their eventual shape, the future President’s plans and early political appointments, signify a reduction in bureaucracy, a desire to reduce the impact of ‘Big Government’ and to stimulate US business activity. Whilst some of the initial Washington department appointees might raise an eyebrow, a positive one was that of Scott Bessant, former hedge fund manager and adviser to George Soros, as Treasury Secretary. His reputation as a good macro-economic forecaster, coupled with his comments about tariffs being used more as a bargaining chip seemed to reassure bond markets particularly. Whether the approach to tariffs will prevail, given the President-elect’s increasing ‘weaponisation’ of such tariffs, remains to be seen. However, he has targeted a 3% real GDP growth rate, an increase in oil production of 3 million barrels a day plus a 3% budget deficit (currently forecast to head towards 7%), which all seem challenging, but should they prove successful, would further underline the US’ status as the global economic powerhouse. The creation of the DOGE (Department of Government Efficiency, but also a play on the infamous digital currency), involving Elon Musk, to target reducing government excess spending sounds praiseworthy, but it’s unclear exactly where significant savings can made at this stage. Meanwhile, the US Federal Reserve signified that they would decrease interest rates on a more gradual basis in the future. However, another cut is still expected in December.

Europe

Market returns from the wider European market were subdued compared to the US and UK, as investors grappled with the result of the US election and political turmoil in the Eurozone’s leading economies, Germany and France. Clearly, given the nature of European exports, in areas such as autos and luxury goods, the region is susceptible to any aggressive tariff raising by the incoming President and initially following the result, markets declined. However, many sectors performed strongly and the German market was up nearly 3%, which contrasted the French market’s decline. The German market is in many ways disconnected with the domestic economy, but the makeup of the index and the euro’s rapid decline against the dollar (which helps to dampen the effect of tariffs for exporters) goes some way to explaining this performance. German companies with exposure to China have been rallying, following the economic stimulus packages announced there. Companies should also benefit from the ECB increasingly dovish approach to interest rates, with more cuts forecast.

UK

With over 70% of earnings of FTSE companies coming from overseas, a weaker sterling against the US dollar goes some way to explaining the main market’s performance during November, although the more domestically focused mid 250 index also performed well. The latter was probably aided by a further interest rate reduction from the Bank of England and positive comments from the Governor about the likely trajectory of future cuts. It also helps to explain how this performance appears to fly in the face of the negative and vocal reaction by companies to the Chancellor’s first budget. The rises in the minimum wage and increased National Insurance contributions from employers are likely to feed through both to employment and inflation, with companies reporting that they would put employment on hold and push the higher employment costs through to consumers. The higher tax burden generally, is not regarded as stimulatory for the economy.

Japan

A resurgence in the value of the Yen helped to turn a headline loss from the index into a small gain for UK investors. This resurgence was part led by the post US-election rally in the dollar and in part by a reported higher inflation level of 2.2%. The latter gave rise to speculation that the Bank of Japan would raise interest rates at it’s December meeting. Such action would not help to stimulate the struggling economy, however a $250bn economic stimulus package was announced by the newly formed coalition government of Shigeru Ishiba. This included a proposed rise in the minimum salary threshold at which point income tax is paid, for the first time in 29 years. This is expected to stimulate the domestic economy, but Japan has a large budget deficit which it needs to finance, so the benefits of effectively cutting taxes needs to be weighed against future borrowing levels.

Asia and Emerging Markets

In Asia and emerging markets, there was a wide dispersion of returns, depending on the underlying economies’ sensitivity to the strength of the US dollar and potential US tariff exposure. In China, manufacturing activity expanded among smaller manufacturers in November, as the Caixin/S&P Global Manufacturing Purchasing Managers Index hit a five-month high. Trump’s win initially weighed on Chinese equities over mounting tariff concerns, but they recovered quickly on optimism surrounding Chinese stimulus, as the domestic economy is also continuing to struggle with the deflationary effects of the depressed property market. The Shanghai Composite rose 1.4% during the month. China is extremely susceptible to tariffs, as President-elect Trump has promised tariffs of up to 60% on Chinese goods, which contrasts with 10% for other countries. However, at present the actual level that will be imposed remains speculation until policy is formulated in the new year.

Outlook

The precise nature of any future policies that will be implemented by the incoming US administration is still not understood and to act now would be speculative. However, the general tone of the rhetoric coming out of the Trump camp is that of looking after American interests. From this, positives could emerge and the recent widening of the source of returns from the stock market, as described earlier, is to be regarded as a positive development. The intention to maintain the Federal Reserve Chair, Jerome Powell, if correct, bodes well and provides for a supportive backdrop for equities. Caution needs to be exercised in relation to government bonds, until we can be certain that inflation is not a consequence of any policy changes.

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 enjoyed 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.

Rockhold Asset Management, with contribution from Alpha Beta Partners, Marlborough and LGT, December 2024.