HeatMap

We expect Q1 2025 to bring heightened volatility in equity and fixed income markets. US trade policy brinkmanship increases inflation risks through tariffs and supply chain disruptions while fiscal policy remains loose. Such a backdrop will likely force the Fed to maintain rates higher for longer and put upward pressure on yields. Regardless, we see diversification benefits from UK and US 10 year sovereign bonds within a multi-asset portfolio, as well as short term pan-European credit.

The US tech led rally will likely continue despite challenge from China but valuations are stretched following two years of outstanding returns. We see cyclical stocks around the world as a risk diversifying source of returns as major economies look inwards in search for growth and resolutions to major geopolitical frictions come into view.

Emerging markets are currently benefiting from the Chinese market rally but this may prove short lived if trade frictions increase significantly.

‍

2025 is likely to be considerably more challenging, with financial markets having to battle with increased volatility. Whilst we are still of the view that the US economy will continue to grow at least on trend for the next several quarters, we remain wary of getting caught up in the exceptionalism theme, as this already looks priced by the market. Our tactical tilts here favour exposure to Financials and smaller companies. In Europe and Japan, we think high levels of dispersion represents a great opportunity for active managers and stock picking will be an important driver of returns. We have therefore increased our exposure to high conviction managers, and those unfazed by going against the crowd.

‍

Global equity markets have had a strong rally, driven primarily by robust growth in the US. The rise of the US dollar and shifting interest rate policies supported investor sentiment. Fixed income returns were more subdued as equities were favoured, with bond markets facing increased volatility. The US led in market performance, bolstered by optimism surrounding policy changes and tax cuts. However, concerns over inflation, geopolitical tensions, and uncertainty regarding future rate cuts could weigh on markets moving forward. Despite strong gains in specific sectors and equity styles, potential headwinds remain for global market stability.  We remain focused on the long-term, with strategic, evidence-based approach that can provide value and stability in an unpredictable market environment.

‍

We are working hard to maintain balance in our positioning. We are especially cognisant that the most compelling investment narratives correspond with the least attractive valuations in equities. For example, we are much more comfortable with US equity exposure than with French exposure, even if the US stock market is trading at 23x forward earnings and the French stock market is trading at 13x forward earnings. As a tonic, we are complementing our regional exposure, which has a pro-cyclical bias, with a defensive bias in supra-regional sector-specific investments.

In fixed income, we maintain a preference for nominal government bonds over corporate bonds, though we do have a rump holding in both floating- and fixed-rate high-yield bonds. Our duration position is neutral.

‍

Given the continued resilience of labour markets, supported by the general good health of household and corporate balance sheets, recessionary risks in the coming quarters seem relatively well contained. Coupled with this promising growth outlook, it also anticipated that inflationary pressures will further abate, paving the way for additional central bank interest rate cuts. In this setting, equity markets have typically found favour, as more accommodative monetary policy builds belief in a more enduring pathway for growth. All told, investors leaning into equity markets should feel relatively confident about their prospects, though, as always, one should be alert to an abundance of risks.

Meriting particularly attention in this final quarter, has been the sweeping victory of Trump’s Republican Party in US Presidential and Congressional elections. Though typically minded to down-play the impact of political developments, it is hard to ignore the potential for more dramatic fiscal policy ahead. Indeed, a potential combination of stimulative tax cuts, whilst supportive for growth, certainly threatens our more benign inflationary outlook. Should risks become sufficiently pronounced, then the Federal Reserve may be compelled to take a qualified ‘pause’ on interest rate cuts. We imagine such an outcome would present a material threat to equity markets, particularly (akin to 2022) for stocks residing at higher valuations. However, given a stark resurgence of inflation is not our core view, we presently retain a positive view on equities within portfolios.

Despite the political noise, we are only recommending modest changes within equity allocations this quarter, with the most dramatic impact stemming from the natural effects of rebalancing. This feature is something we are particularly at ease with given the dominant weighting to US equities within our models, and the phenomenal run this market has enjoyed. Following a strategic change earlier in the year, profits will be redistributed in a fairly even fashion, though the UK market will enjoy the greater share of the proceeds. From a high-level perspective. balance sheet strength, dividend payouts, share buybacks, as well as some optimism about economic outperformance versus some (very) downbeat expectations pique our interest. We would add the dominant presence of oil majors also offers a welcome geopolitical hedge in these all too troubling times. Finally, and as outlined above, the lower valuation setting of UK markets might better shield investors against a resurgence of inflation and a return of central bank hawkishness. This hypothesis also makes UK shares a potentially useful hedge against our dominant US exposure.

It is difficult to argue against maintaining our overweight position in US equities, which, whilst unarguably expensive, have momentum behind them and the most favourable economic backdrop. We think the Fed will still cut rates early next year, economic growth and corporate earnings will increase, and that is a good environment for equities.

Bonds less so, as we feel the inflation threat could come back to haunt, especially with Trump pushing tariffs through.

Outside the US, we think the UK economy could grow faster than expected, and equities look well supported by dividends and buybacks.

We maintain underweight exposure to Europe (slow growth / political chaos) and pretty much neutral on the Asian, Japan, and Emerging Market regions.

We continue to have more in equities and less in bonds in our shorter-term tactical asset allocation. We think the US will continue to perform well. Trump's policies will favour the US but also earnings growth is higher and more resilient than in other developed equity markets.

We also have more in Europe. Global ex-US equities have discounted a lot of disruption ahead. We tend to think Trump will prioritise US growth over a trade war and Europe could perform well in 2025 if Trump tariffs prove not as severe.

We've recently added more to Asia equities. Some countries such as Taiwan were a winner from Trump's policies last time and export demand is decent.

2025 should hopefully be a moderately positive year.

It will however be a balancing act between a strong US labour force and consumer coupled with increasing government spending vs high valuations, inflation & geopolitical risks and an uncertain rate cut schedule.

With growth remaining more resilient in the face of higher rates than many imagined, falling inflation coupled with a remarkably robust jobs market, particularly in the US, we still see the chances of a "soft landing" as the most probable scenario for the global economy, although with some bumps along the way. However, with Donald Trump re-entering the White House, we could see inflation becoming more persistent during the coming months. Despite this we still see central banks maintaining their rate cutting trajectories throughout 2025, although this maybe at a slower pace than previously anticipated. Due to the likely reduced pace of interest rate cuts, we have reduced duration by coming to the front of the curve within our government bond overweight. Within equities we have maintained an underweight position in European equities, where the growth outlook has remained challenged, but have remained overweight within our Global infrastructure allocation as this asset class continues to look attractive.

‍

Plans announced by both US President-elect Trump and Chancellor Reeves should see stronger growth, but also higher inflation. Base rates will not be cut as quickly and sharply as hoped, and higher bond yields are likely longer term driven by Trump's expected tariffs, soaring debt levels and rising interest payments.

We have recently rebalanced portfolios by adding to US equities (in particular mid-small cap funds which should be the biggest beneficiaries Trump's election) and continuing our long-term reduction in UK equities (to improve portfolio diversification and take advantage of opportunities we are finding).

Risks remain in numerous leading economies, and valuations stretched in certain sectors such as Big Tech / AI, and so we are waiting for better entry points before moving overweight.

Equities have had a mixed performance since the US presidential election on 5th November. US stock returns have risen compared to global equities (ex US) in sterling terms. This divergence can broadly be explained by investors’ anticipation of tax cuts and deregulation from the incoming Trump administration, as well as ongoing solid US economic fundamentals.

In contrast, UK chancellor Rachel Reeves’ tax raising budget did little to boost the domestic stock market. Elsewhere, European stocks appear in the crosshairs of potential tariff hikes under president-elect Trump, while the collapse of the German governing coalition has not helped either.

However, despite some geopolitical risks, both economic and company fundamentals remain strong. The ‘soft landing’ increasingly looks the likely path for the US economy, and Trump’s suggested policy agenda of tax-cuts and deregulation should prove a tailwind for equities.

We believe rates will continue to decline steadily throughout 2025, though at a more measured pace than markets had initially expected, and that inflation is largely under control. Albeit likely to be somewhat volatile driven by seasonal fluctuations, base effects and sticky services inflation in the UK, and the potential implementation of tariffs, immigration policy and fiscal spending in the US.

We maintain an overweight position to UK equities, given their relative cheapness, though we remain watchful of the impacts from the recent budget. In the US, we anticipate President-elect Trump's 'America First' policy will provide tailwinds for domestic small and mid-cap companies. Consequently, we are adopting a more risk-on stance and plan to increase our tactical allocation to US equities.

As index-tracking, buy-and-hold, and factor-driven investors, ebi believes that the best strategy is to allocate investments on a long-term basis to the market, rather than attempting to achieve alpha through short-term tactical moves or market timing.

Markets have rallied in recent months following the election of Donald Trump in the US and his pro-growth platform, in spite of potentially disruptive policies proposed in a range of areas, including tariffs on imports from trade partners such as Mexico, Canada and China.

Alongside this, a number of global central banks have continued their move to more accommodative monetary policies over the quarter, including further interest rate cuts, which has been broadly supportive for risk-on asset such as equities.

Our global multi-asset approach remains overweight in equities in aggregate, with a value style in Europe, Japan, Emerging Markets, and the UK. We are also focusing on both Growth and Value styles within the US as well as investing across the full market cap spectrum in our equity allocation.

In Fixed Income, we maintain a barbell approach, balancing long-duration government debt with short-duration corporate credit to navigate varying market conditions and manage interest rate risk.

To enhance portfolio diversification and resilience, we integrate alternative assets, including infrastructure, gold, and defined return strategies, providing potential protection against volatility while capturing diverse income sources.

This multi-faceted approach aims to optimise returns across different market cycles, balancing growth potential with defensive qualities.

The Trump victory creates a level of uncertainty in so much as we can only speculate about how much of the policies outlined during the election campaign will feed through into implementation, especially in respect of trade tariffs, which have been weaponised.

What is clear is there is an 'America first' agenda and this rewards a risk-on but diverse approach to the equity market there. Clearly, the economies of Europe and Asia are especially vulnerable to tariffs, so we need to be vigilant here.

Again, we cannot be certain as to how much the narrative on inflation has changed, particularly in the US in relation to the impact of tariffs and the UK following the budget, but the steepening of the yield curve necessitates prudence by shortening duration.

Following the US elections, we have reduced our expectations of a hard landing and are favouring high-income assets such as short-duration high-yield credit and the banking sector in both equities and fixed income (through AT1s and RT1s as a higher-quality proxy).

We maintain an overweight to our SAA in UK equities vs global equities based on attractive valuations and favour infrastructure equities over real estate equities.

Considering adding to gold given geopolitical tensions.

We are overweight equities and underweight fixed income. Within fixed income, we have a higher allocation than normal allocation to government bonds. Within a multi-asset portfolio, we think that the government bond allocation will be negatively correlated to equities in an equity downturn.

A risk to the view is that investors have become even more bullish on the outlook for the US economy and stock market since the Presidential election. Trump will have a pro-growth (tax cuts) and pro-business (low regulation) agenda. But tax cuts when the US budget deficit is 7% of GDP are riskier than they were in 2017 when the deficit was 3% of GDP. And tariffs are risky for growth and for the inflation outlook.

The final quarter of the year was another strong period for equity markets, which were catapulted higher on the election of Donald Trump to US President. The strong finish to the year, will leave equity markets up over 20%, in Sterling Terms. Conversely, fixed income has been weak, as yields have risen and interest rate cuts have been slower than anticipated. There are also lingering concerns over government debt levels and spending intentions. The election of Donald Trump and full control of Congress by the Republican Party was received very positively by markets, resulting a 3% bounce in equities. The expectation is for tax cuts and a roll back in regulation, seen as supportive for corporate earnings and shares. Uncertainty remains from the foreign trade policy, where an increase in tariffs is expected. An increase in tariffs is likely to lead to reciprocal measures from the target countries, in aggregate, weighing on global trade and increasing inflation. Domestically, much attention was given to the inaugural government budget. Tax increases were expected although there was significant speculation over where they would fall. In the end, an increase in employers national insurance took the bulk of the burden, with the headline rate increasing and the lower threshold reducing. Higher inflation is likely. Economic data continues to suggest a decelerating global economy, with weakening labour markets the key indicator for this. Unemployment rates edge higher in many developed markets, albeit from low levels. This has coincided with a weakening in forward looking PMI surveys. Development of these data will be closely watched may markets. Looking forwards, weakening growth and stubborn inflation could become a headwind for an equity market that is increasingly expensive. Trading on a 19.6x multiple, the equity market is now at its most expensive in recent history and, when compared to government bond yields, may pose a less attractive option to investors over coming quarters.

‍

We continue to advocate an overweight position towards equity markets on the grounds that robust economic growth, particularly in the US, should support earnings growth at current levels. While traditional valuation metrics appear expensive, they are distorted by the concentration of mega cap tech, and look more reasonable when this is accounted for.

The dominance of mega cap tech has also led to greater profitability and higher returns on capital for global equities, which justifies their valuation premium to prior periods.

As for bonds, credit spreads are exceptionally tight, with limited scope for further capital returns. This warrants some profit taking, as we reduce our bond allocation in favour of alternatives.

We currently hold a neutral position in asset allocation terms. Within equities we are overweight Japanese companies funded by small underweights to the UK and European markets. Within bonds we are largely neutral, with a tilt towards longer duration assets.

‍

A strong year for most asset classes proves yet again that markets are adept at climbing a wall of worry. 2025 may prove more tricky. China has yet to engage with meaningful growth, Europe is in danger of dipping below stall speed, and the UK Budget has failed to breathe life into the animal spirits of business.

The US, in contrast, enters the year in bullish mood. However, you have to 'pay to play' in America. Market concentration and valuations will leave our US exposure at similar levels, but with a higher weighting in smaller cap. European exposure will remain low with a messy political and economic outlook. With the consumer in a generally healthy position and valuations low, UK small cap might be increased.

We will likely remain neutral on Asia/Emerging, due to sensitivity to trade tariffs and a strong dollar. Full tariff enactment is one of the main worries for 2025, the other is uncontrolled fiscal deficits, and we remain wary of longer-duration debt.

The fourth quarter of 2024 was a big one for global politics, with the most significant event for markets being Donald Trump winning the US presidential election. Over in Europe, we saw the sacking of the German Finance Minister as well as a 'no confidence' vote for the French Prime Minister amid budget disagreements. In Asia, martial law was briefly declared in South Korea.

While there may be some banana skins ahead, in the short-term, we believe economic data is likely to remain favourable and it will take several rounds of poor data points to significantly concern investors. We therefore hold a neutral view overall on risk assets, with a positive view on equities balanced by a negative view on investment-grade credit, particularly in the US where we now see credit spreads at 30-year lows.

With inflation at current levels, our models continue to see diversification benefits from its bond holdings.

Generally, 2024 was a good year for investors and overweight positions to US equities and gold were positive in a year when they were the star performers, each rising over 25%. Coming into 2025 we remain positive on both. Gold can be helpful in the portfolio mix to counterbalance rising inflation or geopolitical risk. US equities have their own unique mix of dominant tech companies but also an abundance of firms where valuations are less stretched. Whilst neutral on bonds overall, we are overweight government bonds where yields are more generous than they have been in decades and there is the potential for price appreciation in the event of economic weakness. In contrast, we are underweight corporate bonds where credit spreads seem too miserly for investors to get excited about. Whilst there will be plenty of change over 2025 we are positive on the prospects for markets given the ongoing strength in the US economy.

US equities are set to outperform the rest of the world in 2024. This would mean that over the past 15 calendar years, the US will have outperformed in 13 of them for a Sterling investor. US equities now represent about 65% of global equity market capitalisation, and several of the biggest American companies are now worth more than the entire stock markets of major European countries, such as France and the UK.

We acknowledge that the US is home to many of the world’s best companies and dominant technology firms, as well as seeing good profits growth and a potential boost from the Trump administration. Yet we are concerned about the high valuation of its equity market and its largest constituents.

We expect to be underweight the US relative to global indices at around 40% of the overall equity portion of portfolios. We see potential in the relatively lowly-rated UK and in Emerging Markets, as well as benefits from using a global thematic approach.

We've kept our asset allocation marginally overweight to risk, under a base case expectation that a meaningful recession is avoided. Bond yields appear range bound for now, struggling with the challenges of forecasting inflation.

The potential broadening out of the US market under a Trump-led, pro-business regime is set to be an important theme for 2025. Alongside this – but very much linked to the US and the potential for higher tariffs – is the level of support China is going to provide its economy. Recent talk has felt more robust and targeted, with references to both Fiscal and Monetary policy. However, nothing said or done yet has proved to be the catalyst for a sustained market recovery.

We expect a modest rather than meaningful slowdown in global economic growth in the months ahead. While interest rates remain on a downward path, recent economic data means the market is pricing in fewer rate cuts over the next 12 months than were previously expected.

After a period where US tech giants have dominated, we expect market returns to be spread across a broader range of companies and for equity markets elsewhere in the world to begin to narrow the gap with the US.

We believe bonds look attractive because demand from investors is likely to increase as rates on cash deposits fall. In particular, we favour government bonds.

We have made a measured increase to our exposure to UK equities, on the basis of attractive valuations and a more supportive macroeconomic backdrop. We are also maintaining our allocation to infrastructure, a sector we expect to benefit as interest rates fall.

On investment returns for the first quarter of 2025, we are cautiously optimistic. Our strategies generally have an equity growth bias. We are comfortable with that. We believe, especially in developed markets, selective growth-focused equities will continue to perform well.

In fixed income, we are average to shorter duration in quality bonds which should benefit in the easing rate cycle. In many of our investment strategies, we also hold quality liquid alternative strategies for diversification, risk management, and steady return gains.

We will continue to investment manage with a focus on the long term, taking investment views looking forward in years as opposed to months. At the same time, we are pragmatic. If there is a superior reason to change any investment, we will do so.

For us, it is about trying to identify, and then invest in, the very, very small number of companies that have the potential to be truly globally outstanding.

Global markets delivered sharply contrasting returns in November, with US indices reaching new highs while other regions struggled with mounting economic and political challenges.

Looking forward to 2025, fixed income markets continue to offer attractive returns for conservative portfolios while maintaining their diversification benefits. We maintain a disciplined approach to risk management, particularly regarding high-yield bond exposure where valuations have become more challenging.

Similarly, while Japanese equities have performed well, we remain vigilant regarding yen vulnerability and associated risks. While maintaining our constructive outlook, we remain vigilant regarding potential risks and continue to emphasise portfolio diversification and systematic risk management in our allocation decisions.

Q4 brought confirmation of Trump 2.0 and with that, the market started pricing in a flurry of policies that the new Government is expected to enact. However, the economic outlook and current monetary policy situation mean that simply repeating the investment decisions of 2016 are not the answer. Initial optimism of what Trump may do has provided a shot of adrenaline to areas that performed well last time but we don't see enough evidence that Trump will have the same levers to pull this time. Positive equity market momentum could continue to push stocks higher which is why we still have a near neutral stance, but on a risk-adjusted basis, Government bonds still look attractive and we have a positive stance on duration – this can't be ignored.

In the UK, valuations remain at comparatively low levels to the US and we see several opportunities for stock pickers to take advantage of these mispricing's rather than buying an index tracker. This is why we hold an overweight position in the UK where we look to pick some of these stocks ourself. Underweighting emerging markets balances our equity position, largely on the account of a lack of confidence in the Chinese stimulus packages. Given ongoing debt deflation in the economy and depressed sentiment particularly among households due to falling house prices and savings rates (where the majority of Chinese wealth is held) the stimulus measures announced so far may not be enough to create a cyclical recovery in the mainland economy.

‍

Renewed interest rate uncertainty in the US and UK have reinforced our preference for shorter-dated investment grade corporate debt. After an outstanding 2024, we still see good opportunities on a risk-adjusted basis.

The US is likely to continue to dominate equity market returns, but with an increased shift towards the valuation opportunity in mid and small cap. Longer-duration assets such as infrastructure offer significant potential over the medium term, but with renewed interest rate uncertainty, may mark time over the first half of the year.

With a decisive Trump victory, we expect America to continue to dominate global markets in terms of economic growth, corporate earnings growth and global equity market performance. America First policy making will underpin US economic, earnings and market exceptionalism. We expect American exceptionalism will now be the objective, not the result of policy-making. Thus far, high equity market valuations have been justified and underpinned by strong corporate earnings growth. Hence the need for continued selectivity through 2025. We see the risk of debt indigestion as government debt levels are spiralling in the US and the UK. Debt levels look (just) sustainable for now, but are in fine balance. Any upgrade to borrowing or downgrade to growth could destabilise this fine balance and rattle the bond markets. We also see "Zombie" inflation, which means it's down but not dead. Wage growth pressure, trade frictions and energy volatility create upside risks to inflation. Re-acceleration of US inflation and geopolitical shocks are the main risk to markets as these could trigger a contraction of high valuation multiples.

‍

It's been just a matter of weeks since Donald Trump secured his victory over the Democrats in the US presidential election and markets continue to grapple with what this means for the global economy and financial markets. On balance, Trump's campaign pledges of corporate tax cuts and deregulation should be positive for corporate America and will likely provide a near term boost to the US economy. However, we continue to watch developments closely, mindful there are hurdles ahead for the Republicans. Whilst supportive of US growth rates, the underlying policy mix of the new Trump administration should prove inflationary. This could complicate the path for central banks, and we see heightened risks that the Fed will need to delay rate cuts. As we look forward, we envisage a shift higher in both bond and equity market volatility reflecting the abrupt changes and unconventional methods of policy communication from Trump. Whilst the new administration in the US introduces some uncertainties in the path ahead, we remain alert to developments and optimistic about the opportunities that volatility will inevitably present.

‍

The final part of 2024 was dominated by noisy events such as the US election, the UK Budget and Ukraine. So investors can be  forgiven from being distracted the fact that economies are actually bobbing along a pretty normal path.

Inflation is creeping closer to the 2% central bank target and interest rates are coming down (albeit slowly), so the outlook moving forward is positive (albeit not necessarily the extraordinary levels of growth seen post-COVID).

Of course this journey towards a more “settled” economic period will still have its moments of market volatility, but the beauty of diversified portfolios is that they are set up to navigate that environment as a default – that’s WHY they exist. So we are around neutral on equities, ensuring that we have a diverse exposure across regions and sectors; in particular looking to mitigate the concentration seen in the US (33% of the index in the top ten companies? No thanks).

By focussing on really simple approaches such as our equally weighted allocation in the US (top ten companies are 2% of the index …) our portfolios should benefit from the broadening out of earnings expectations we are beginning to see. And in the fixed income world we’re also around neutral on duration. Sure, rates are coming down; but not at a likely rate which would suggest a strong overweight.

In our view, this is a world which calls for duck-onomics in our portfolios. No, we haven’t gone quackers. We just think that for much of the time, portfolios shouldn’t be doing too much – like a duck paddling along on the current. There’s the odd branch to dodge, or fish to eat, or wave to ride, but nothing worth diving down or taking off for. We’re letting the current work, while still keeping an eye on the river ahead.

‍

We believe markets are at a pivotal juncture, grappling with geopolitical developments, inflation trajectories, and central bank policies. Early 2025 will likely see key market influences from US inflation data and central bank decisions, while China's policy measures will be closely monitored for indications of economic support. Although volatility may persist, longer-term investors could find opportunities in these conditions. We remain cautiously optimistic, noting that bond yields appear to be stabilising, and several global markets offer relative value. While some analysts suggest that long-term returns in markets such as the US may be subdued, we advise against dismissing these areas entirely, as valuations could continue to rise. Our portfolios remain well-diversified across asset classes and sectors. While US equities hold a significant position of our equity allocation, we are also positioned in other, potentially more attractively valued equity markets for the year ahead.

We are entering an interesting period for markets. Having slain the inflation beast in the second half of 2024 and with rate cuts being enacted, central banks will be wary of a potential re-ignition of inflation. This is made more acute as new governments globally look to address low growth with expanding fiscal policy. A potential tariff war globally is also a real risk to rate cuts.

The market has already discounted significant cuts to rates in 2025, and we believe that while we are still in a cutting part of the rate cycle, there will be fewer cuts than expected. However, there is still significant value in sovereign and investment grade bonds, and so we are maintaining our position.

The effect on equities will probably be neutral, and as long as earnings hold up, they should provide decent returns.

We like to look for areas of complacency and how that is creeping into positioning for possible opportunities to both protect portfolios on the downside or add something that gives them better prospective long-term returns. We feel bond markets are where those opportunities lie at present.

Inflation shifting lower, towards central bank targets, throughout 2024 has led attention in markets elsewhere. In particular, the raft of planned and unplanned elections and wider geopolitical events has generated plenty of headlines and suppositions. That has left inflation somewhat in the shadows and markets unaware of the vulnerabilities and the consequences for nominal bonds.

Our equity positioning remains well diversified. There is no telling how or when this will prove beneficial, but an over concentration of risk can be disastrous.

As 2024 comes to a close, political shifts in major developed economies have been a consistent theme throughout the year, often resulting in increased polarisation within countries. The beginning of 2025 will see the inauguration of a new US president, accompanied by high expectations of increased protectionism both domestically and, consequently, internationally.

These developments are likely to lead to higher inflation, particularly in the United States, and may prompt central banks to reduce the pace of interest rate cuts. However, this is expected to be accompanied by a number of growth-promoting policies, which could potentially bolster equity markets.

Overall, we maintain a fairly balanced and well-diversified approach across our portfolios, recognising that rhetoric does not always translate into actions, and actions do not always yield anticipated results. We believe this strategy will serve our clients well in the future.

After a tricky December, we would expect the market to remain volatile around the inauguration of Trump. Although the initial read-through was that Trump's policies will be business friendly, we are conscious that growth and inflation could be at risk as a result of other initiatives like trade and government efficiency. Although there is uncertainty, plenty of other markets still sit on attractive valuations, with pessimism very much baked in, especially in Europe and the UK. The German election in February could be a catalyst for a European recovery should the debt break be lifted.

‍

We remain overweight on inflation-linked bonds, as recent data suggests inflation could reaccelerate or at least plateau above the Federal Reserve's target. With Trump set to assume the presidency in January, his administration's focus on expansionary policies may add further inflationary pressures to the economy.

We maintain our overweight positions in Asia and Emerging Market equities, supported by attractive valuations and their lower correlation with US large caps. Continuing weak data in China may finally encourage the Chinese government to implement additional fiscal stimulus.

In fixed income, we remain underweight credit due to the minimal extra compensation offered for the added risk over sovereign bonds. We continue to be overweight emerging market local government bonds as we see the Federal Reserve easing cycle will particularly benefit these localities.

We are also underweight European equities and fixed income due to the ongoing political turmoil.

We are neutral on equities. Whilst a global recession over the next 12 months remains possible, we believe the chances of a severe economic slowdown have materially reduced. Within equities, we have reduced exposure to the US after such a strong run of returns. We have increased exposure to the better valued UK and emerging market regions. We also hold a lower risk (minimum volatility) equity strategy, in case recession risks unexpectedly increase. Given the rise in bond yields, we believe the case for bonds is more attractive now than it has for years. Our preference remains for high quality bonds, a reduced sensitivity to interest rates and increased exposure to inflation linked bonds, given the uncertain path ahead for inflation.

The re-election of Trump has heightened investor focus on fiscal policy and deregulation. We have been positioning portfolios for a "higher for longer" interest rate environment by reducing fixed income and adding to US equities, which should benefit from lower taxes. Japan is becoming an increasingly important allocation for us, with strong demand signals in the domestic economy, and currency dynamics that should favour foreign investors. While the clean energy theme continues to face headwinds, bipartisan support for water and grid infrastructure underpins an exciting opportunity for sustainable investors. We remain watchful of geopolitics, which continues to be the major tail risk facing markets. Our portfolios are positioned for diversification and secular growth, as captured by our impact themes.

It was a red sweep with the Republicans taking the Presidency, the House of Representatives, and the Senate. This means they have control for at least two years when the mid-term elections will take place. Stock markets bounced on proposed cuts to corporation tax – which could make US companies overnight more profitable when introduced. The S&P 500 and Nasdaq 100 were up 7.1%* and 6.5%* respectively in sterling terms during the month.

The proposed introduction of tariffs will lead to a re-focusing on US-produced goods and potentially could have a positive impact on the US economy. However, this is an incredibly complicated situation and, as we saw in 2019, could lead to an all-out trade war, which is bad for the global economy.

Bond markets initially sold off after the Trump announcement because of the concern of greater debt levels, but they eventually calmed, and bond markets delivered strong returns during the month. This was because of sensible deficit targets and a raft of weaker-than-expected economic data across the globe, which led to the view that interest rates need to come down quicker than expected.

The US election boost to markets is being treated like it’s 2016, ahead of proposed tax cuts and government spending. Yet inflation is a risk to the region if tariffs are implemented in 2025.

In Europe, outlooks and consumption have weakened. The real benefit is coming from the Emerging Markets and China, where new stimulus measures could drive consumption. Interesting to see Brazil, Russia, India, and China trading in currencies other than the dollar now. Is this the start of a global shift for trade, and will the dollar maintain its upward path? It’s difficult to see this turn right now with the big US names benefitting. Yet it’s led us to allocate away from US debt and more to UK government bonds, as well as greater overseas equity exposure outside of the magnificent seven.

2024 was a standout year for markets, defying expectations once again. What lies ahead in 2025? No one knows. However, history has shown that equity markets create wealth over the long run. Trying to outguess them is a fool's game. High valuations can persist in the right environment, and timing the market rarely works. The best approach remains what has always worked: staying invested, keeping costs low, and maintaining global diversification. Ignore the noise, resist the urge to tinker, and let time and compounding do the heavy lifting. As always, patience and discipline will win out in the end.

‍

There have been some reasonably significant short-term responses to the US election result (strong US equity returns, weak Asia/EM returns, rises in US bond yields, fall in gold, etc.), but we await the detail before we can make any reasoned judgements.

Indications of initial US policy are that they could re-ignite inflation, and this may force the US Federal Reserve to consider increasing interest rates, something that is not on investors' radar and would be received negatively by most asset classes.

Growth in Europe is weakening, and there are short-term worries about UK growth following the budget, but the European Central Bank has cut rates again, and the Bank of England could surprise with a December rate cut. All this creates an uncertain outlook for many asset classes, although this creates opportunities as well as bringing risks.