Inflation – A Year of Improvement

This time last year we predicted that 2024 would see a continuing decline in the inflation figures and the possibility of interest rate cuts in the UK. We are pleased to say that this has turned into reality, with inflation hitting a more than three year low of 1.7% in September. Although it has since turned a bit higher, it is still only a little above the Bank of England’s (BOE) 2% target and way below where it was at the start of 2024. This has enabled the BOE to reduce interest rates from a high of 5.25% in August, for the first time since March 2020. At the time of writing, the official interest base rate currently sits at 4.75%. The current outlook is for further cuts, albeit maybe at a slower pace than previous forecasts, due to the somewhat inflationary aspects of the October Budget. After the budget, the £ fell (increases import prices) and the price of Gilts fell which increases their yield (cost of government debt) as a reaction to the size of additional borrowing announced in the Budget. These effects can be somewhat inflationary, but are tempered by low levels of economic growth.

The UK economy has remained in positive growth territory, no doubt helped by a moderation of inflation and interest rates, however growth has been weak, and the near-term growth outlook remains uncertain after the Budget hit business confidence, across the UK. However, as long as inflation and interest rates continue to decline, the economy should continue to grow, albeit at less than a stellar pace!

UK Shares – Still Undervalued

The UK stock market has seen positive returns so far this year (FTSE All Share up 11.39% at time of writing) however this has been somewhat disappointing compared to some other global stock markets, particularly in the US. This ‘underperformance’ is partly explained by a lack of technology exposure in the UK stock market, which has been the major driver to returns in the US. However, it is also due to the price of UK shares continuing to be highly undervalued compared to their US peers. A long overdue revaluation was hoped for this year, but has so far remained elusive, even after July’s decisive General Election confirmed political stability for the next five years, which is in contrast to a number of other major countries. However, with the price of UK shares looking even cheaper now than previously from a global perspective, there is continuing prospects of a reset higher, in values. It is always hard to know what the catalyst for a change in market valuations will be, but nothing stays cheap forever.

The current versions of the Rosemount Tactical Portfolios have been constrained by the UK stock market’s returns, but remain well exposed to UK Equities and therefore would benefit from any ‘re-pricing’ of UK assets. It would make little investment sense swapping good value assets for ones priced at historic highs. In any case all the up to date portfolios are positive for the year so far, with returns ranging from around 6% for the Tactical Cautious portfolio to over 10% for the Tactical Adventurous portfolio.

Global Overview – Steady Growth

This year global growth is on track to be over 3% and is expected to remain at a similar level in 2025.
While nothing exceptional, it is a reasonably solid rate of growth. However, this hides large underlying differences, with emerging market and developing economies set to grow by 4.2% and advanced economies by just 1.8%, this year.

The US is seen as growing by a relatively modest 2.8% this year, but stock market returns do not always follow economic growth. The S&P 500 has seen very high returns of over 29% so far this year (in US $ terms). The US stock market rallied strongly after Donald Trump won the US election, on the back of his tax cutting and de-regulation promises. Technology stocks have done particularly well, which is not surprising given Tesla’s CEO, Elon Musk being subsequently handed an influential position in Trump’s administration.

With Trump not being installed into the White House until 20th January 2025, it remains to be seen what he will deliver and what impact on the US economy and stock market he will have next year. His last term in office did show that he can be unpredictable, so I guess we will have to wait and see!

Europe is expected to grow at a sluggish 0.9% this year, not helped by political upheaval in France and Germany, but at least inflation has come down to around target. The 2025 outlook for Europe looks much the same.

Japan is one area that has been quite different. After years of zero or negative inflation, growth and interest rates, this year’s modest amounts of inflation and growth along with rising interest rates is seen as a path back to a normal economy. Even though the Japanese stock market (Nikkei 225) has seen high growth in 2024, Japanese shares are still regarded as good value compared to US equities.

India’s economy has seen another year of high growth of around 7% and its stock market (Nifty 500) has also had a great year, up over 21%. In contrast China’s economy has been struggling, comparatively. However, the Chinese government has taken measures to prop up its economy and this has helped its stock market (SSE Composite Index) to have a better year than last year’s negative return, with growth of over 14%.

Overall 2024 Picture – A Year of Good Investment Returns

Generally, 2024 has been a good one for Equity markets and Bond investments have also had another positive year, again helped by moderating inflation and interest rates. There has remained underlying tensions and risks, with the ongoing war in Ukraine and various escalations in hostilities both there and in the Middle East, that have occurred in 2024. However, despite the concerns these hostilities cause, oil and commodity prices in general have stayed relatively stable, helping keep markets calm.

Outlook For 2025:

As ever, making predictions about the future is not easy. Looking at next year there are a number of uncertainties, chief among those is what the Trump administration will do when it takes up office in January. Particularly its actions with regard to Ukraine, but also the Middle East, China and Europe. If Trump decides to aggressively pursue a trade war with China and Europe, this could have an impact on global stock markets. However, we know that Trump has previously taken note of stock market reactions to his policies and hopefully this will influence his decisions. Most of his policies do seem to be stock market friendly.

The US economy does appear to be picking up speed heading into next year and Trump’s “pro-growth” policies are expected to help this continue. Sentiment in the US is always a major influence on global equity returns and the fundamentals in the US are continuing to improve, going into 2025, as they were this time last year.

The UK continues to be a very undervalued market, when compared globally. This has sustained the trend of global companies buying up ‘cheap’ UK companies, given their stock market valuations.

Sentiment within the UK economy has fallen since the General Election in July, but the UK economy is still growing, and we know that foreign investors continue to see potential in the UK. Over the course of 2025 it is quite possible that an improvement in sentiment could occur and with it, an uptick in the fortunes of the UK Stock market.

The global inflation and interest rate outlook for 2025 appears to be one of continuing moderation which is generally good for Stock and Bond markets. Especially with the positive global growth expectations.

Sources: Reuters, Bank of England, Office of National Statistics, European Commission, IMF, The Economic Times, Schroders.

Past Performance is no guarantee of, or guide to future returns.
The value of investments and the income from them can fall as well as rise and you may not get back the original amount you invested.
The comments made in this review represent our current investment views and are in no way a guarantee of future performance.