2024 has been a difficult year in which to navigate investment markets in a period rarely more dominated by global politics, heightened geopolitical tensions and the narrowness of market returns which continued to be dominated by the Magnificent 7 technology stocks, though aided by a sharp recovery in the financial sector.
The lengthy period of uncertainty ahead of the UK budget, which contained the highest tax rises on record, employers facing rising NI contributions and minimum wages as well as tough new workers’ rights, have stymied the economy. The delay also gave rise to much speculation as to what might be included, although the removal of the exemption to inheritance tax of pension funds and private businesses and farmland was unexpected. Having pledged a growth agenda, the Chancellor put much store in the independent judgement of the Office for Budget Responsibility, for which she will be disappointed with their dismal forecasts for economic growth. The new government’s generous public sector pay rises, free of any need for productivity gains, and additional costs for private businesses all has a very 1970s feel about it. Then as now, taxes were especially high and with the wealthiest 1% of taxpayers already contributing 28% of all income tax receipts, the Chancellor should be mindful that those individuals have the capacity to move their capital and expenditure away from the UK economy and out of the reach of HMRC.
With the US Presidential Election being too close to call right up to the week of the election itself, Donald Trump romped to a decisive 312 - 226 victory over Kamala Harris. US markets had evidently not priced in the result – and the subsequent ‘Trump Trade’ of the prospect of deregulation and lower corporate taxes has fed the momentum in US stock prices.
Global government debt is now around $100 trillion as Western governments continue to spend with abandon, led by the US, which in the last fiscal year spent $6.1 trillion but collected taxes of just $4.4 trillion, creating a deficit more commonly associated with a recession. Clearly, this cannot go on and Trump seems to be the only leading politician actively wanting to address this. The US market continues to look relatively expensive, reflecting US exceptionalism as it enjoys leadership in all the main industries of the future, especially artificial intelligence. On the other hand, the EU appears to have chosen the path of regulation over innovation, with the result that all eight of the world’s $trillion stocks are American and the top 10 stocks now making up a staggering one third of the S&P 500 Index.
The Chinese economy has endured a surprisingly rapid deterioration which the government is keen to address. However, its mantra of production for export being virtuous whilst consumption is deemed sinful has adversely affected domestic demand. This underlines why so many international companies have been badly hurt by plunging demand in China.
Whilst the year ahead will likely prove to be more volatile, optimism on corporate earnings supported by strong liquidity and falling interest rates, as governments seek to reflate their economies, should provide a constructive backdrop for investment markets in 2025.
The value of securities and their income can fall as well as rise. Past performance should not be seen as an indication of future results. All views expressed are those of the author and should not be considered a recommendation or solicitation to buy or sell any products or securities.
