- Whilst we remain in an interest rate cutting cycle, the journey may be shorter than previously anticipated. This is particularly the case in the United States, where President-elect Trump’s policies (if implemented), could serve to keep inflation at a higher level and therefore make the US Federal Reserve more cautious in its approach.
- Central bank policies are set to diverge in 2025. If the US extends tax cuts and implements tariffs and immigration controls, the Federal Reserve is likely to signal a slower, shallower path of easing in the coming year. The Bank of England faces balancing Labour’s Budget that increased spending against rising taxes damaging consumer confidence and curtailing corporate spending. The ECB, at least on paper, has an easier hand to play. Growth is low, confidence even lower and politics (in France & Germany) looks a source of instability. Bucking the trend lower, the Bank of Japan will ever so slowly continue raising interest rates.
- Inflation is a far less troublesome foe than in recent years, settling into a slightly elevated holding pattern in 2024, which is likely to persist in the UK. Globally the outlook looks like one of slow growth, but hiding in this is stronger growth in the US; improving growth (but from a very low base) in the UK and Europe; and China struggling relative to its pre-pandemic trend. China continues to struggle resurrecting consumer demand and grasping hold of significant structural issues in its economy.
- Fixed income yields rose into the end of 2024. The glass half full will see another chance to snap up attractive yields with a helpful backdrop of central banks cutting rates; the glass half empty will caution about fiscal overspends, particularly in the US, and fewer rate cuts than expected being a headwind for capital returns. Elevated government deficits in various economies present concerns around the sustainability of long-term debt servicing. Corporate credit spreads (the extra yield over government bonds) look firmly valued too, but overall corporate health looks acceptable. For fixed income, we remain more in the glass half full camp and anticipate solid returns, but 2025 is likely to see a trimming back of some interest rate risk in client portfolios.
- There are some highly cash generative companies in areas such as mega-cap US equities, trading at a rich valuation, but with strong forecast earnings growth. Equity market valuation differences abound. In developed markets, the US trades at an ever-higher premium versus most, whereas the UK looks cheap. In emerging markets, China looks troubled but cheap, whilst India & Taiwan look expensive. Geopolitical uncertainty remains an ongoing concern.
- In currency markets, sterling has been a relative winner during 2024, strengthening against both the euro and the Japanese yen and largely holding ground versus the mighty US dollar.
- It has been a good year for gold bugs, the yellow metal closing 2024 at $2,628, not far off its all-time high of $2,792, reached at the end of October.
- Brent Crude prices weakened from over $90 in April 2024 in the face of slowing economic growth and the risk of surplus supply emerging if OPEC presses ahead with bringing back more production this coming year. Brent crude finished 2024 at $74/barrel, which is roughly where it started the year.
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