David Aujla

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.