What has happened...
Another year down and it has been yet another eventful close to the year economically and politically. On the economic side the most recent inflation data releases show western inflation rising again above the target 2% rate. The US economy appears to be in sound health with strong growth anticipated, posing a quandary for the Federal Reserve and the prospects for the number of future interest rate cuts in this cycle. Meanwhile in the UK and Eurozone, the economic prospects look less buoyant, raising the prospects for the potential of stagflation, when the economy stagnates whilst inflation increases. A stagflation environment also presents a challenge for policy makers and negatively impacts consumers especially when combined with record post WWII taxes reducing further spending power.
Politically, most global incumbent governments that held elections this year have been thrown out of office, or at the very least, seen their majorities significantly cut. Even newly elected governments are having challenges. In the UK, following the fallout from the October budget, the Prime Minister’s approval ratings have slumped to new lows and a petition calling for a new general election has reached over 3 million signatures. On the Continent the fragile coalition governments in Germany and France are on the verge of collapse, potentially leading to regional instability. In the United States, the Democrats received a thumping at the November elections with the Republicans winning a clean sweep of President, the Senate, and the House of Representatives.
On the geopolitical stage, war continues in Ukraine and recently escalated as NATO governments approved the use of their long-range missiles to be fired deep into Russian territory. For the time being restraint prevails whilst there remains hope that when Donald Trump takes power, his administration will look to de-escalate the situation in search of a peace deal. More recently the Assad regime has been deposed in Syria, leaving many questions at the time of writing as to the new regime and the wider effects on the already unstable Middle East region.
Market reaction through December…
Over the month of December 2024, The FTSE 100 was down 1.38% and over 12 months up 5.69%. In Sterling terms, the more technology and growth biased US S&P 500 index was down 1.05% over the month and up 25.51% over the 12-month period. Meanwhile, the global FTSE All World Equity Index in Sterling terms was down 0.96% for the month and up 17.48% over 12 months. By contrast for government bond pricing, the UK 10 Year Gilt price was down 2.31% through December and down 0.23% over 12 months. Whereas, the US 10 Year Treasury price return in GBP terms was down 1.61% over the month and down 5.84% over 12 months to date.
Portfolios…
During December we made some changes on those applicable portfolios, specifically in the Emerging markets arena. On the Emerging Market Debt (EMD) front we switched out of the Nomura fund due to recent fund outflows, which reduced the fund size to levels that are too small for us, given our all-important liquidity considerations. The proceeds were reinvested into the Pictet EMD Fund which has an excellent track record of consistent returns and risk management during periods of heightened volatility. On the Emerging Market Equity (EM EQ) front we sold out of the First Sentier Asia Pacific Fund following its strong run and taking profits, reinvesting into two new funds, the first was Bennbridge Global EM EQ Fund which is a high conviction strategy looking to buy high quality companies that are reasonably valued. The second fund is the Redwheel Next generation EM EQ Fund which invests in the next generation of nations to emerge and the enormous opportunities they present to investors, complementing the other Emerging Market equity funds in the portfolio.
Outlook…
The US economy remains on a sound footing and as Trump takes office, we anticipate that his economic policies should provide a further set of catalysts for growth, although at the risk of higher inflation. The current market pull back is welcome in our view as the markets could not have continued on the strong 2024 trajectory, as much of the so-called ‘Trump Bump’ following the US election, had rapidly been factored into market pricing, leaving many US markets at expensive levels. We continue to believe that the US markets are attractive over the longer term, and this heathy pullback will provide even more attractive entry levels further down the line.
In the UK and Europe, we continue to monitor the prospects of potentially anemic growth and higher inflation… ‘Stagflation’. At this time, our exposure to UK and European stocks are either through high quality companies with global earnings, strong pricing power and management to withstand such conditions or high-quality mature companies with well covered dividend payments as a strong source of return. As we move through 2025, we anticipate that we will continue to build on the portfolio’s exposure to the United States whilst reducing our UK exposure given the current prospects from a political and economic standpoint over the next 5 years. Overall, we continue to monitor those direct equity holdings that we would like to buy for portfolios, and should our purchase price targets be met, will enable us to add some further quality names to the portfolio at excellent prices for the medium to long term investor.
Important Information
This article is for information only and does not constitute advice or recommendation and you should not make any investment decisions based on it. The views and opinions of this article are those of Casterbridge at the time of writing and may change without notice. Any opinions should not be viewed as indicating any guarantee of return from investments managed by Casterbridge nor as advice of any nature. It is important to remember that past performance and the value of an investment, and any income from it, may go down as well as up and the investor may not get back the original amount invested.
