True lifelong financial planning for the serious business of life.
True lifelong financial planning
for the serious business of life.
True lifelong financial planning for the serious business of life.
True lifelong financial planning
for the serious business of life.
Category: Financial Planning
“Watch your thoughts; they become words. Watch your words; they become actions. Watch your actions; they become habits. Watch your habits; they become character. Watch your character; it becomes your destiny.”
Laozi, born 4th Century. Ancient Chinese philosopher and author of the Tao Te Ching, the foundation text of Taoism.
November, and the final few days of October, brought a flurry of significant events from the UK budget to Donald Trump’s US Presidential Election victory, interest rate cuts in the US and UK, and China’s announcement of a new stimulus programme designed to boost growth. In this commentary, we offer some reflections on these events.
On 30 October Chancellor Rachel Reeves delivered Labour’s first budget for 14 years. This represented a major reset for fiscal policy. In an apparent acceptance of a permanent increase in the size of the State, the Chancellor raised taxes, borrowing, and expenditure significantly. Taxes are on course to hit a peacetime high as a share of GDP and public expenditure is set to run at around 45% of GDP throughout this parliament, a level that has not been seen since 1948.
The scale of the increases in taxes – the largest for at least 30 years – was exceptional. The government has portrayed it as a one-off, necessary to stabilise Britain’s public finances and to start to rebuild the country’s infrastructure and public services.
However, the Budget does not provide a narrative for growth because overall, while infrastructure is an important requirement it is not the main driver of growth. Similarly, better NHS services may help address long-term sickness, but this is not a silver bullet. What is missing is recognition of the pivotal position of the entrepreneur. This is not the small number of tech or finance whizzkids, but the thousands of small business owners, the true engine of growth over centuries. Despite some cosmetic concessions, this Budget will place a high burden on them.
Institutions play a vital part in economic success. As outlined in “Why Nations Fail,” the authors of which recently received the 2024 Nobel Prize in Economics, the economic success or failure of countries reflect the economic models permitted by the politicians in power. In essence, a society that respects property rights, which fosters scientific and technological progress, which is centralised enough for the rule of law to be maintained yet pluralistic (where citizens have a stake in the outcome) is well placed to succeed. There may be an element of looking back at what has worked, Britain in the 18th and 19th centuries and the US more recently, but it makes sense. In such an environment the entrepreneur can succeed, and competition kills off the inefficient or complacent.
The impact of the biggest tax change – the £26 billion increase in employers’ National Insurance contributions (NICs) – is difficult to assess. Bank of England (BoE) governor Andrew Bailey said firms could deal with higher costs through some combination of raising prices, accepting lower profits, improving productivity, making smaller wage increases, or cutting jobs. The Office for Budget Responsibility (OBR), which forecasts the impact of tax changes, has a more straightforward view. It estimates that in the long term, 76% of the total cost of higher NICs will be passed on to employees in the form of lower wages. As a result, the OBR has reduced its previous forecasts for wage growth in this parliament.
Some retail firms, including Sainsbury’s and M&S, have said they will raise prices to cover the cost of higher NICs while pub chain Wetherspoons said “all hospitality businesses” will increase prices because of the tax changes. Shares in UK bakery chain Greggs fell 8% after Deutsche Bank predicted that the chain faces an extra £97 million in costs over the next two years as a result of the budget measures.
As an aside, a recent statistic caught my eye. In answer to a Freedom of Information Request it was revealed that there are 63,700 civil servants in the Ministry of Defence (MoD) compared with the combined armed forces (Army, Navy, and RAF) of around 130,000. So, there is approximately one civil servant at the MoD for every two service personnel. Is this an example of administrative growth to aid efficiency or bureaucratic creep? Does it have wider resonance?
In the days following the Budget, the BoE cut UK interest rates by 0.25% and noted that the measures announced by the chancellor will add 0.75 percentage points to GDP and around 0.5 percentage points to consumer price inflation in a year’s time. The main driver is large increases in government consumption and investment, which will pump up demand in the near term. Any improvements in the supply capacity of the economy from higher levels of investment will take much longer to materialise.
Meanwhile over in the USA, Donald Trump sent shock waves round the world after staging the biggest comeback in political history to defeat Kamala Harris and become the 47th President, having also been the 45th. The response from financial markets was swift and positive as investors anticipate that a Trump-led administration will drive higher growth, higher inflation, and potentially a stronger dollar. At the same time, Bitcoin hit a record high as Trump has positioned himself as an ally of the US crypto industry and Bitcoin is perceived as a hedge against inflation.
US interest rate expectations also rose as markets priced in higher inflation on the back of promised tax cuts and increased tariffs on imports. Although the Federal Reserve reduced US rates by 25bp at their November meeting, the pace of easing is expected to slow from here, with markets pricing in interest rates falling from the current level of 4.5% – 4.75% to 3.75% by the end of 2025, up from previous expectations that rates would fall to 3.4% late next year.
Shortly after the US election, the Chinese authorities unveiled a $1.4 trillion fiscal stimulus package, the latest in a series of measures, including interest rate cuts and increased government borrowing, designed to bolster flagging growth. Some commentators speculate that the Chinese authorities also want to support domestic activity in anticipation of new US tariffs on Chinese exports. The loosening of fiscal and monetary policy has helped boost Chinese equities which, having more than halved in value between early 2021 and late 2023, have risen by over 20% this year. However, the measures undertaken in the last year have not had the desired effect on activity, which remains lacklustre. It seems likely that the Chinese authorities will announce further stimulus next year.
On the face of it, 2025 should be a positive year for the US and the UK, with good growth and falling interest rates. The economy of the euro area is also picking up, albeit with Germany lagging. After an emphatic Trump victory, the new unknown relates to US policy.
Let’s end back on the UK Budget. The fact that the IMF has welcomed this Budget is not a surprise. Another institution staffed by very clever people but have they practical business knowledge? There often appears to be little correlation between the subject and the real world. In many ways, this Budget might be the mirror image of Lizz Truss’ offering. It is a left of centre solution to raising growth – but one with much more institutional backing. The UK Chancellor has nailed her colours to the mast: more investment spending will deliver higher growth, setting off virtuous feedback. Let’s hope she is right.
“A newspaper is a device for making the ignorant more ignorant and the crazy crazier.” H. L. Mencken 1880-1956. American journalist and cultural critic.
A Trump card for stock markets.
Once again, pollsters and forecasters were proven wrong. What was thought to be a close presidential race turned out to be anything but, with Donald Trump winning decisively.
The morality of Trump may be a topic of discussion, but the politics of Trump is not. It is very clear he will cut taxes, deregulate the US, spend on infrastructure, put American interests first, and use the S&P 500 – the US stock market – as the key barometer of his presidency. No wonder stock markets responded positively to the news he had won.
Trump will go down as one of the most consequential presidents of our lifetime. Very few leaders have a lasting impact on the countries they govern. Thatcher, Reagan, and Gorbachev changed the arc of their countries, and Trump did that in his first term by redefining the relationship between the US and China in a way that cannot be undone. It is likely the second Trump presidency will be equally consequential as he now knows how government works and in theory should be more successful in delivering his agenda.
If Trump is successful, it is likely the US will remain a positive place to invest. Lower taxes and fewer regulations are business and corporate profitability friendly. All other things being equal, expectations for economic growth in 2025 should be higher and the probability of the often-mentioned imminent recession lower.
The downside to Trump, however, is also easy to see. Stronger economic growth will revive concerns over inflation, which has already been seen in rising bond yields. The ‘America first’ narrative may have important consequences for Ukraine, and even Taiwan, where their defence may not be seen to be as strategically important as in the past. The erratic nature of his policy making will also create greater volatility.
Putting this together, the best way I can describe the investment environment with Trump is higher risk and higher reward. Economic growth in the US will likely be stronger, but so too could inflation and geopolitical tensions. On balance, it seems likely equity and bond markets will continue their recent trends: up for equities, down for bonds.
Lessons from the Q3 results season.
At the time of writing this commentary, we are approaching the end of the final reporting season before the year end. Corporates offer the most effective window into the world as it is today and offer views on how the future might be. Here are some takeaways:
We are moving closer to the end of the year, when both its story and the result becomes clear. All years have their challenges and idiosyncrasies, and this one is no different, but for equity investors it has been a positive one. Key global markets, such as the US, have made all-time highs and absolute levels of return have been at or above high single digits. This reflects corporate profitability continuing to grow at a good rate, which is the fuel for equity markets. It also reflects the view that interest rates, a key variable in valuing corporate profits, have begun to fall. Corporate profits and interest rates will be key variables for equity markets in 2025.
Fixed-income markets have, however, struggled to keep up with equity markets, but areas such as corporate bonds have delivered positive returns. Bonds will remain sensitive to interest rate and growth expectations.
It has been a bifurcated market, however. The US is a strong economy, but there are two types of consumers: wealthy consumers, typically those who own property and shares, are spending freely – hence why it is hard to get a plane ticket between New York and London. However, consumers on lower incomes are struggling with inflation that has not been compensated for in wages. A good example of this can be seen in the airlines sector which continues to make new highs, whereas dollar stores are struggling.
The same goes for China; consumption is weak and companies who sell into that market are struggling. However, the industrial sector is stronger, as exports of goods in key sectors such as cars are booming. Even though the overall Chinese economy is struggling relative to its past, there are pockets of strength.
What this teaches us is that generalisations can be useful but are rarely the full story. It has been a good year for investors so far, but what you’ve owned and where has mattered more than ever. This is a trend we expect to continue.
I would like to thank all our clients and introducers for your continuing support. As this will be the final edition of the Clarion for 2024, I would also like on behalf of all my colleagues at Clarion, to take the opportunity to wish everyone a very merry Christmas and a happy, successful, and healthy 2025.
The next edition of the Clarion will be in January, and we look forward to updating you regularly throughout 2025. We invite you to get in touch if you have any questions.
Keith W Thompson
Creating better lives now and in the future for our clients, their families and those who are important to them.
Any investment performance figures referred to relate to past performance which is not a reliable indicator of future results and should not be the sole factor of consideration when selecting a product or strategy. The value of investments, and the income arising from them, can go down as well as up and is not guaranteed, which means that you may not get back what you invested. Unless indicated otherwise, performance figures are stated in British Pounds. Where performance figures are stated in other currencies, changes in exchange rates may also cause an investment to fluctuate in value.
The content of this article does not constitute financial advice, and you may wish to seek professional advice based on your individual circumstances before making any financial decisions.
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From the whole team at Clarion, merry Christmas and a happy new year.