November Overview
The noise in Financial markets in November was dominated by the outcome of the US presidential election. The Republican party has gained control of both chambers of Congress and Donald Trump was elected as the 47th president.
World markets had mixed reactions to this news, with US growth assets performing strongly on the back of an expectation of a more nationalist trade policy, further tax cuts and an expansionary fiscal policy.
However, China and Emerging markets were far more wary of the news, and this was reflected in their returns over the month. This rally in the US was also helped by positive economic data, as October saw retail sales increase by 0.4%, which was greater than expected.
More widely, central banks continued to lower rates during the month. The Federal Reserve (Fed) voted to lower rates by 25 basis points to a target range of 4.50%-4.75%. This was driven by an improvement on disinflation and recent employment data. In the UK, the Bank of England also cut its policy rate by 25 basis points to 4.75%. However, financial markets remain focused on the fact the Bank has increased its inflation projections for the next two years following October’s UK budget.
October inflation data experienced a slight headwind.
In the UK, headline inflation increased from 1.7% to 2.3% and core inflation was up from 3.2% to 3.3% year-on-year. The eurozone Consumer Price Index (CPI) climbed back to the 2% target in October, with energy and food inflation the drivers. Looking to 2025, there are concerns that Trump’s policy proposals could reignite inflation and is likely to temper US rate cut expectations in the next 12 months.
Turning to growth assets, US equities ended the month sharply higher with the major US equity indices at, or close to, record highs. Expectations for de-regulation following the Trump win benefited financials and the energy sector in particular. This positive momentum was helped by the Q3 earnings season, with earnings per share growth ahead of expectations at 9% year-on-year.
Emerging markets lost ground in comparison as a strengthening US dollar and fears of a less supportive US monetary environment, negatively impacted.
In terms of factor performance, small cap companies were the stand-out performer. as domestically exposed US small caps were seen as beneficiaries of the US election result and this drove wider global small cap returns.
With defensive assets, Japanese government bonds continued to decline due to expectations of ongoing Bank of Japan interest rate hikes and an accelerated pace of balance sheet reduction in 2025. In contrast, both UK and US 10-year treasuries strengthened over the month.
In summary, heading into the festive season, global equity markets have benefitted from a spate of good news.
The world economy looks well placed to grow steadily into 2025, whilst the extent of the Trump victory opens the door to a major shift towards tax cuts and deregulation. Threats aplenty, such as a trade war or much higher bond issuance, are seen as far away. As we look ahead, successful asset allocation in 2025 will partly depend on how different governments and industries respond to such threats.
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