The final quarter of 2024 was shaped not only by economic dynamics but also by significant political developments that set the stage for 2025. The US presidential election concluded with Donald Trump returning to office, sparking a wave of anticipation and uncertainty about his administration’s policies including corporate tax cuts, deregulation and tariffs. The new Labour government unveiled its first budget, with Chancellor Rachel Reeves setting the tone for Labour’s vision of economic management, spun as prioritising growth through investment in infrastructure, green energy and public services whilst committing to fiscal responsibility.
Global markets ended the year on a strong note, supported by easing inflation, stable interest rates, and resilient corporate earnings. Technological advancements in artificial intelligence, renewable energy, and healthcare continued to fuel growth, while post-election rallies in US banks and industrial companies linked to the onshoring of trade provided additional momentum. Consumer-facing companies, now undervalued after a challenging year having been impacted by higher prices and interest rates, now present opportunities to invest in well-known global brands at discounted valuations.
In October, Rachel Reeves’ first budget represented a transformative shift in UK fiscal policy, aligning with Labour’s manifesto commitments. It focused on addressing persistent economic challenges, including inflation, stagnating productivity, and the cost-of-living crisis via tax reform and infrastructure investment, whilst maintaining strict fiscal responsibility. While markets initially welcomed these measures, concerns remain about the sustainability of public finances. With government borrowing still elevated, further fiscal discipline will be required in the years ahead. Sterling held steady following the budget announcement. However, the outlook for the UK economy remains tied to inflation trends, monetary policy, external post-Brexit trade relationships, and broader challenges, including sluggish GDP growth and structural trade issues. This necessitates a selective and cautious approach to investments in the UK. The Bank of England held interest rates at 4.75% and continues to project a path towards further monetary easing going forward, though there is a sense that its hands may be tied by pressures from elevated levels of inflation.
UK gilts are now approaching levels recorded at the time of the Truss tantrum in 2022. It is now possible to achieve annualised equivalent yields of more than 7% for higher rate taxpayers, due to the tax efficiencies of investing in discounted UK gilts held to maturity. Nevertheless, higher borrowing costs are feeding back into a deteriorating fiscal profile and there is a growing sense that the Labour government is quickly running out of ideas. There is a danger that Rachel Reeves will be breaking her promise not to raise taxes further, less than a month after making this claim. Meanwhile, it is interesting to note the rise of the Reform party, highlighting the parallels with Trump’s success in the US.
The US presidential election on November 5th was the year’s defining political event. Trump’s victory brought optimism about pro-growth policies but raised concerns about geopolitical stability. Markets responded positively in the immediate aftermath, buoyed by expectations of corporate tax cuts, deregulation, and a renewed focus on infrastructure investment. These policies, if implemented, could stimulate economic growth in the near term, particularly in sectors such as energy, industrials, and financials. However, the potential for increased geopolitical tensions, stricter trade policies, and a renewed focus on “America First” economics could create volatility in global markets. The Federal Reserve cut rates by 0.25% in December, signalling potential monetary easing in 2025. However, inflation risks from Trump’s policies could prompt a rate hike later in the year. Relations with China and other trading partners are expected to be strained – and heightened US isolationism may disrupt global trade flows. Domestically, concerns about fiscal discipline and debt sustainability could arise as the administration balances tax cuts with increased spending.
In Europe, the market environment remained subdued. French political instability subsided with the ousting of Barnier, but upcoming parliamentary elections left the region in a temporary state of limbo. Although discussions around heightened EU defence spending persist, public appetite for military expenditure remains limited amid economic challenges. The German economy's outlook remains cautious, reflecting broader regional economic issues.
There are renewed hopes for Chinese monetary stimulus, but at the same time, a structural downbeat view on the Chinese economy persists. China's government must prioritise boosting domestic consumption for sustainable recovery, which could, in turn, stimulate emerging markets and commodity demand. As we have highlighted for some time, we see a shifting of the tectonic plates underpinning the Japanese economy and, as inflation becomes more normalised, Japanese households, which have long sat on large cash balances, have increasingly placed money into assets like equities, which may deliver a real return and avoid an outcome that can see an erosion of net worth.
Vigilance regarding potential policy changes and their market impacts is essential, especially Trump’s implementation of tariffs and immigration policy. Warren Buffett's assertion that no one has profited by betting against the United States rings true, as pro-growth policies may favour US equities, particularly cyclical sectors in 2025. Further monetary easing will be subject to data highlighting a weaker economy and lower inflation. We now see the Federal Reserve on hold in the first half of 2025. There remains plenty of economic and political uncertainty in the year ahead, but for the time being the US economy continues to exhibit solid growth momentum. Although interest rates remain at a level deemed relatively restrictive, if the policies enacted by the upcoming Trump Administration lead to inflation risks emerging on the upside, then the next move could conceivably be a hike, not a cut, in the second half of the year.
To conclude, the final quarter of 2024 highlighted the interplay between political events and market dynamics. As we move into 2025, the investment landscape is positioned for continued growth and the conditions for another year of positive economic performance are firmly in place. Next year will be another year of great challenges and heightened ongoing geopolitical tension in regions such as Eastern Europe and the Middle East. Markets are likely to be shaped by a combination of policy decisions under the Trump administration, the UK’s ongoing economic reforms, and broader global trends. A disciplined, diversified investment approach remains critical to navigating the uncertainties ahead and capturing opportunities in an evolving world and a changing economic and geopolitical environment.
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.
