We hope you are all extremely well and following on from last month’s talk of the UK budget, it seems some quarters remain quite anxious/disappointed/angry with the policies adopted. Unfortunately, it is not at all clear if the revenue raising exercise is over, with the headroom determined in the budgetary calculation fully eroded based on prevailing interest rates. Of course, between now and the next fiscal event, interest rates could reverse, or growth could improve, however, forecasts are not suggesting this is a high probability event.

Turning to markets and there can be no doubting that Donald Trump’s historic comeback was the major market event in November, if not the year, as both he and his Republican Party swept the board in the US Presidential and Congressional elections. Though marginal favourite heading into the election, the emphatic result removed any prospect for legal dispute and lingering political uncertainty, offering immediate relief to riskier assets, particularly equities. The decisive outcome would also allow markets to focus on Trump’s headline policies, with an expansionary fiscal agenda and ensuing growth impulse seemingly paramount in investor minds. Once again US shares enjoyed the most pronounced gains as hopes for more generous taxation policies, coupled with more abrasive international trade policy, raised relative expectations for US Growth versus the Rest of the World.

Unlike equities, up to and shortly after the election outcome, the bond market was performing quite poorly as the threat of inflation and less interest rate cuts, driven by demand enthusing tax cuts and tariff induced price increases, became the dominant narrative. As the month progressed, however, most sovereign bonds were able to recover any recent capital losses, as accelerated fears of growth retarding trade policies raised interest in the asset class.

It can be very difficult to disentangle trade policy motivations, and the ultimate goal of the incoming administration. An issue made even more challenging by the constant flow of social media updates from the President-Elect. A key question investors want answering is whether trade tariffs form part of a negotiating strategy or if tariffs (and a protectionist wall) are the goal unto themselves? Nominations to the Trump administration fail to clarify this conundrum, with a mix of moderate and hard-line/’Make America Great Again’ candidates looking to take leading roles.

In the absence of such clarity volatility could well fill the void, however, prevailing conditions are also supportive for equity gains. In keeping with prior monthly letters, resilient labour markets, ebbing inflation and interest rate cuts point to a more enduring runway for growth and is supportive for equity allocations within portfolios. As a result, a choppy but rewarding period ahead remains (on balance) the core expectation for equities. Despite this positive framing, however, we’d be keen to stress the risks to equities remain prominent, be that the prospect of recession or resurgent inflationary risk.

Notwithstanding the delivery of lower interest rates, most borrowers will likely suffer an increase in debt service costs at any imminent refinancing event; a dynamic which may yet squeeze the growth out of a (gradually) slowing US economy. We would also highlight the risk of resurgent inflation should Trump or the US Federal Reserve push too hard on stimulating the economy. In such a setting, we suspect the Federal Reserve would be forced to reverse course (again), swiftly and dramatically raising interest rates to finally see-off the menace of inflation. Higher interest rates and bond yields would also act as something of a regulating mechanism upon the government’s own expansionary efforts too, potentially reigning back any considered excess. Such an outcome would threaten a more material downturn for both the economy and stock markets.

Kind regards,

iPensions Wealth Team

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