December monthly investment update – Reflections on November 2024, and a look ahead

In this update, Wesleyan’s Director of Investments, Martin Lawrence, takes a look into some of the UK and global events that took centre stage in November, and the plans for our funds in 2025.

November was nothing if not eventful: As the UK nation faced the reality of what Labour’s budget announcements meant for them, more than 10,000 farmers marched on Westminster to protest over the new Inheritance tax rules it contained. On a global stage, there was an even bigger reality unfolding in the US: The country with the world’s largest economy saw the November-held elections end in victory for Donald Trump after success in the ‘so-called’ swing states.

Back in the UK, the weather was also making headlines: Storm Bert caused widespread flooding across England and Wales; and snow made an early appearance for most parts. As thoughts turned to the cost of heating our homes during the colder months, the rise in energy prices (which took effect in October), helped to push UK inflation back above the targeted level of 2%. The jump from 1.7% in September to 2.3% in October was a little higher than the markets had hoped for, but fitted our working assumption that CPI would (temporarily) rise again towards the end of 2024.

Interest rates expectations

What has been a surprise move is the view of the Bank of England on interest rates. After digesting the Exchequer, Rachel Reeve's first Labour budget, the Bank cut interest rates, as expected, by 0.25% in November (from 5.0% down to 4.75%). However, the Bank has indicated that it is likely to only cut interest rates ‘gradually’ in 2025, as the budget (now reflected in the Bank’s own projections), has lifted inflation expectations compared to what was said in August 2024.

Forecasts from the Bank now see inflation sitting above the 2% target before falling gradually below it by mid-2027. The Labour budget was, of course, designed to ‘re-ignite’ growth in the UK economy. And it is certainly needed judging by the anaemic GDP (Growth Domestic Product) growth figure of just 0.1% (provisionally) recorded for the third quarter - after the UK economy shrank slightly in September.

Global growth

Slowing growth is not something unique to the UK. We’ve commented previously on the issues faced by countries like China (which is still trying to stimulate its economy) and Germany (where its manufacturing sector is still struggling). Economic growth in Europe overall was just 0.2% for the second quarter, and looks to have grown only marginally faster in the three months to September 2024.

Political instability in Europe is currently very visible in both Germany and France, where ruling government coalitions appear to be falling apart and a return to the polls is possible. France is yet to agree a suitable budget for the country (at the time of writing).

Country budget deficits are certainly something we'll be keeping a watchful eye on next year because countries like France, and the US, for example, are already running quite large ‘fiscal deficits’ (spending more money than they are receiving in taxes). Governments should ideally build healthy budget surpluses during their good economic times in order to leave them enough in the coffers for when times get harder. Unfortunately, the arrival of Covid (where governments were forced to spend money) and geopolitical events such as the Russia/Ukraine war (where governments needed to dig even deeper), have not allowed them sufficient time to get their finances into healthier positions. At least, not yet.

US Inauguration and trade tariffs  

If 2024 was the 'year of the ballot box' then perhaps 2025 will be the ‘year of political policies'. We have already had a sneak preview of the fallout from the UK budget – with no doubt more to come on this next year. On 20 January 2025, all eyes will be on the US as President-Elect Donald Trump will be sworn in as the 47^th President of the United States. Having scored a Trump ‘trifecta' following the November election – Mr Trump effectively becomes not only President, but also gains control of the Senate and the House of Representatives too – giving him a massive power advantage which could be key to pushing through his ‘big promises’ that got him elected in the first place.

Contrary to the UK, and parts of Europe, economic growth in the US has remained far stronger and the US stock market has performed exceptionally well (rising much faster than we had expected since late summer). In the short term, these moves look likely to continue due to the favourable tailwinds of better economic growth and a pro-business President in Mr Trump.

It would be remiss of us not to mention Mr Trump’s ‘reportedly’ favourite word "tariff" and his threat of imposing them on imports from countries like China, Mexico, and Canada once he takes up office in the White House. Higher tariffs effectively push prices up and we share the concerns of others that this could feed into higher US inflation - and potentially global inflation if other countries retaliate with tariffs of their own.

The US Federal Reserve reduced interest rates by 0.25% in November, and were already becoming concerned about how much further inflation could fall, given the continued strength of the US economy. ‘Price tariffs’ could, therefore, further dissuade the Fed’s Chair Jerome Powell from cutting rates much further – possibly disappointing investment markets in 2025.

A look ahead  

We think there is good long-term value in many US shares, and we expect to make further purchases of them for our funds next year, along with other overseas markets. We are mindful that stock markets, especially the US, have performed very well in 2024, and a lot of ‘good news’ is therefore already reflected in some share prices - so active management will be key.

We also expect to continue buying corporate bonds and government bonds because we still see good value in fixed income investments (bond markets) thanks to those higher interest rates which remain available. For similar reasons, for our With Profits Fund, we will continue in 2025, to look out for further commercial property opportunities, following the successful acquisitions we've made during 2024.

As it’s the time of year to reflect on what has gone before, and think about new beginnings for the year ahead, we would like to wish you all, the greetings of the season. We’ll be back in 2025 with more reflections as the year unfolds.