January Market Commentary

Introduction

A New Year gives us the chance to look forward. We can expect more change in 2025 for personal finances, with a new Labour budget laid out and a returning President in the US.

2024 was a year of speculation and political change across the world, with President Trump and the Labour Party the key pieces from a UK investor perspective. Trump will be sworn in on 20th January 2025. Donald Trump and Keir Starmer are now faced with having to deliver on their promises, and whilst they are very different personalities, both have promised growth to their respective electorates as a way out of the inflationary pressures they have been enduring in recent years.

Trump has the advantage of an economic tailwind. All the indicators in recent months have been that the US economy is starting to fire on all cylinders. It came too late to help the Democrats, but should help Trump in the early part of his second, and final, term of office.

Starmer, and his Chancellor Rachel Reeves, face an uphill battle. Like much of Europe, most notably and most worryingly Germany, growth has stagnated, public services are struggling and public opinion is concerning. The plan is to attract private investment into the UK to match some significant public expenditure on infrastructure projects, and stimulate longer term growth in the economy. Whether this will work effectively will always be subject to ideological debate, but the US election shows that the public will run out of patience if visible results do not appear well before the next election. Economic indicators are fine things, but voters need to feel the benefits directly, whether that's through higher earnings, lower prices or better facilities.

It is worth reminding clients ahead of another year that diversification is core to our advice, so your investment portfolio as a whole is not reliant on the performance of any single sector or part of the world.

UK

Economists project that the UK economy will grow by 1.7% in 2025, supported by anticipated interest rate cuts, albeit at a slower rate than previously expected, and increased government spending. 
Inflation remained above the Bank of England's 2% target in December. This was widely predicted as the October budget was expected to trigger some further inflationary pressure, and slow the pace of interest rate cuts. The Bank maintained borrowing costs at 4.75% in December, expressing concerns over rising wages and prices potentially sustaining inflation.

Business confidence was reported by the British Chambers of Commerce as at a two year low. Only 49% of the firms they surveyed said they expect their turnover to increase in the next twelve months, down from 56% in the quarter before the budget. 63% of them cited tax, including National Insurance, as a concern. Whilst this was not unexpected, given the significant new tax burden placed on employers through National Insurance, a government hoping for growth and cooling inflation will not want to hear that fewer business intend to invest for growth in 2025 and 55% of those surveyed expect to increase their prices to customers to compensate for increasing staff costs in the year ahead.

The recent economic indicators are not good, and business sentiment suggests there is little sign of a swift turnaround. The S&P Composite Purchasing Managers' Index (PMI) for December registered at 50.4, indicating marginal growth and marking the lowest point since October 2023 and the PMI's employment index dropped to 45.8, signalling a significant slowdown in staff recruitment.

On a high point, the FTSE 100 climbed 0.6% to its highest level in over a week on the last trading day of 2024, locking in gains for a fourth straight year and its best since 2021.

Europe

Europe's economies remain brittle after a troubled 2024.

The eurozone's economy contracted for the second consecutive month in December. The HCOB Composite Purchasing Managers' Index (PMI) rose slightly to 49.6 from 48.3 in November but remained below the 50 threshold, indicating continued contraction. This downturn was primarily driven by a sharper decline in manufacturing, while the services sector showed modest recovery with a PMI of 51.6.
On a more positive note, the zone's service businesses are performing better and should be sheltered from any future trade tariffs imposed by Trump.

"December PMI data doesn't exactly lay a fantastic foundation for a service sector boom in 2025, but at least incoming business has stopped falling and the decline in order backlogs has softened," said Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank.

The European Central Bank cut interest rates for a fourth time in December and kept the door open to more easing, with a Reuters Poll of 75 major economists suggesting there are cuts totaling 100 basis points expected in 2025.

It is difficult to predict European performance in 2025. The worst of the political turmoil and pessimism of 2024 may now be gone and there could be an opportunity for recovery. However, there is always the threat of further political instability and a trade war, so it is wise to remain cautious. European stock prices remain influenced by US policy.

United States

Donald Trump takes office on 20th January and the President Elect has been typically noisy during the waiting period. This has included a little sabre-rattling in the direction of the Fed.

We have commented previously on the early market reaction to his election, which was mostly priced in some months before voters went to the polls, and we should now wait and see what happens once he is in power.

Inflation persisted above the 2% target in December. Prices rose 2.7% in November compared with a year before, according to consumer price index (CPI) data released by the Bureau of Labor Statistics. Core inflation, which removes food and energy costs, held at 3.3%. In response the Federal Reserve (Fed) reduced its key interest rate by 25 basis points in December, bringing the target range to 4.25%-4.50%. There has been some speculation whether the Fed has wanted to cut now, ahead of Trump's second term, so that it can take more time over future cuts in 2025. Senior Fed official, Tom Barkin, warned of greater inflation risk in 2025. “Wage and product costs could see pressure,” he said in January. “If they do, given recent experience with inflation, price-setters might have more courage to pass costs along.”

Whilst US manufacturing activity contracted ahead of potential trade tariffs, the U.S. economy is expected to continue its expansion in 2025 with the labour market, a key concern for the Fed, looking resilient.

Despite favourable economic indicators, public sentiment remained cautious. An AP-NORC poll indicated that 70% of adults rated the economy as poor at the end of 2024, an increase from 60% in October, highlighting a disconnect between economic data and public perception. This was a major problem for the Democrats in their election campaign.

Far East

China hit its 5% growth target for 2024, albeit assisted by the $1.4 trillion in credit and liquidity its central bank pumped into the economy from September.

The manufacturing sector experienced a slowdown, with the Purchasing Managers' Index (PMI) edging down to 50.1 in December from 50.3 in November. This declaration was attributed to declining output and persistent price pressures.

Conversely, the services sector demonstrated resilience, with the Caixin Services PMI rising to 52.2, the highest in seven months, driven by robust domestic demand. However, concerns over potential U.S. trade policies continue to temper business optimism.

Chinese equities ended 2024 on a positive note, with the Shanghai Composite Index achieving a 13% annual gain, its strongest performance since 2020. However, this performance was heavily supported by the government's fiscal stimulus.

China's economy has been weighed down by weaker consumption and investment, and a severe property crisis, in recent years. Exports could face more U.S. tariffs under a second Trump administration. As a result it is too early to assess whether China's fiscal intervention will have a lasting effect on the economy or just helped it through 2024.

The Bank of Japan (BOJ) maintained its accommodative monetary policy stance, with Governor Kazuo Ueda indicating a cautious approach to future rate hikes. While acknowledging the need to assess various risks, Ueda expressed hope for achieving the BOJ's 2% inflation target in 2025, having previously raised rates to 0.25% last year.

Japanese equities performed robustly, with the Nikkei 225 rising 19% over the year, marking the best two-year stretch in a decade. The index reached 39,894.54 by December 30, 2024, close to its all-time high of 42,438.00 in July 2024. This rally was supported by strong corporate earnings, increased shareholder activism, and a weaker yen, which benefitted exporters.

Emerging Markets

Emerging markets experienced a divergence in economic performance in December, as in 2024. While economies like India and South Africa maintained strong growth, others such as Brazil faced challenges.
Equity markets performed well as 2024 closed, mainly driven by the Asian tech rally. Trump's trade protectionism is a threat and an opportunity. Some emerging market currencies may be well placed to weather high U.S. Treasury yields and a strong dollar, but some economies, such as Mexico could be badly hit. A strong dollar could see capital outflows from emerging markets.

Fluctuating oil prices, trade tariffs and geopolitical tensions, such as the ongoing Russia-Ukraine conflict, have all contributed to market volatility and uncertainty in emerging markets in 2024 and will continue to do so into 2025 until resolved. 

Conclusion

Whilst there will always be short term volatility most portfolios will have performed well during 2024 and it is worth remembering that the doom and gloom we often see in the media is not representative of real life. This is most clearly reflected in the US AP-NORC poll cited above, as the performance of the world's largest economy is extremely positive but only 30% of Americans can see that in their pockets at the moment.

We are hopeful that inflation will continue to slow in 2025, interest rates continue to be cut, and businesses through the UK and the world prosper. We understand the positive impact that has on ourselves and everything around us.

And Finally...

Did you know that the Earth's driest place isn't the Sahara Desert.

The Atacama Desert in northern Chile is considered the driest non-polar desert on Earth, with some areas having had no recorded rainfall for over 500 years.

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