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[5 min read, open as pdf]
With rate cuts less likely, and zombie-inflation proving sticky, there are dual pressures on long-dated gilts. Whilst for some it might be satisfying to blame higher UK bond yields on Rachel Reeves, comparisons to the "Truss moment" are not entirely fair. There is a difference in my view. Here's why: Truss yield spike: fear that UK books not balancing, disregarding OBR, not showing workings - only UK yields affected. Idiosyncratic UK bond market risk. Conclusion? Politicians ignoring how markets work. Reeves yield spike: fear that US and UK books not balancing PLUS US/UK debt issuance indigestion. US & UK yields simultaneously affected. Idiosyncratic UK AND Systematic US/UK bond market risk. Conclusion? Markets ignoring what polticians say. The Reeves era of yield pressure is different from the Truss/ moment of her 2022 budget. But that doesn't help. A review of bond duration and how to mitigate the risk of zombie inflation is required to cope with bond indigestion. 
In our 2025 outlook, we explore our key themes for the year ahead
Subscribe to our weekly newsletter to get all our insights to your inbox (for UK financial advisers only) [5 min, read as pdf] Our 2024 Investment Review covers how the 2024 turned out relative to our Outlook. In our 2025 Investment Outlook we do not attempt to set target levels for market indices: level-specific forecasts are unhelpful and impossible to predict with certainty. Instead, we focus on the key themes that could characterise investment trends within and across asset classes and hence inform the decision-making for advisers’ investment committees we serve. The summary of our key themes for 2025 is set out below. America First: US exceptionalism to continue America First policy making will underpin US economic, earnings and market exceptionalism. US economic growth is outpacing the UK and EU. It benefits from higher energy prices and defence spending. American dominance of technology sector means its corporate earnings in aggregate have been more resilient, relative to the rest of world and the UK. Higher earnings growth has been rewarded with higher valuation multiples. Given the levels of market concentration, selectivity and balance within US equities remains key. US political and economic policy, and the performance of both its economy and its markets continue to define the global landscape. The newly-elected Republican government brings with it a strong mandate, emphasizing economic nationalism and trade protectionism. With a renewed "America First" policy framework, the outlook for US economic growth, corporate earnings and equity markets remain robust. The U.S. economy is expected to perform well in 2025, bolstered by domestic-focused policies and the competitive advantage it is afforded by an international trade environment that will be increasingly contested with Trump’s threatened tariff policy. The divergence between US and UK/European economic trajectories underscores this exceptionalism, with US economic and earnings growth accelerating while UK/European growth lags. Whilst the Russia-Ukraine war and related sanctions is bolstering the US Energy and Defence sectors, the remapping of European energy supply chains and resulting inflation for manufacturers is hollowing out European industry. The much-debated focus around lower UK equity market valuations is a function of lower UK corporate earnings growth, in our view. This has been the case both over the past decade, and looking forward. Without an accelerating growth trajectory or reason for a valuation re-rating, there is a risk that the relatively lower valuations for UK equities persists. We nonetheless recommend a low-moderate UK allocation as a useful diversifier, given the UK’s declining correlation with global markets. Dominance in technology has underpinned healthy corporate earnings in the US, relative to other regions. This earnings strength has supported higher valuation multiples for US equities. Combined with favourable interest rate dynamics, this has propelled market outperformance. Over the past decade, cumulative returns for US equities have materially outpaced global and UK markets, a trend likely to persist. We have to remain alert to anything that dislocate a richly-valued US equity market: agility from a sector and factor positioning perspective can be helpful in this respect. Debt indigestion: government debt is in fine balance Government debt is spiralling in the US and the UK. But with projected economic growth, aggregate debt levels remain (just) digestible. But any upgrade to borrowing or downgrade to growth could destabilise this fine balance and rattle the bonds market. Lower bond yields (higher bond values) mean more confidence in the bond market. Higher bond yields (lower bond values) mean less confidence in the bond market. The sustainability of government debt levels poses a significant challenge for both the US and UK. This combined, with new Governments and spending priorities increasing uncertainties. Rising interest rates have meant increased borrowing costs, putting pressure on fiscal balances. In both the UK and the US debt levels appear high in absolute times, but just manageable relative to GDP. However, any weakening in economic growth or fiscal indiscipline could destabilise this fine balance. These concerns have supported demand for gold and precious metals as Emerging Market Central Banks reduce exposure to the Dollar/US Treasury holdings. We will be monitoring new debt issuance carefully to see if the amount of government debt remains digestible without dislocating yields. Inflation: down but not dead “Zombie” inflation means it is down but not dead. Inflation is past its peak and settling at or above the 2% target which is now a “floor,” not a “cap”. Wage growth pressure, trade friction and energy market volatility means that inflation is down but not dead. Inflation has moderated from its peaks, but we believe it remains a very real risk. The 2% inflation target increasingly functions as a floor rather than a ceiling. Wage growth, energy volatility and geopolitical tensions could drive renewed inflationary pressures. To address this risk, portfolios should incorporate inflation-resilient asset classes, such as a tilt to yield within equities, and moderate exposure to liquid real assets, as well as short- to medium-term inflation-linked bonds. Asset Class Perspectives for 2025
Conclusion The three themes outlined above illustrate the forces shaping the investment landscape and asset class trends in 2025. As always, our approach emphasises an adaptive approach to navigate market risks. This does categorically mean trying to time the markets. But it does mean trying to avoid foreseeable harms along the way. Our granular asset-class recommendations are available to our clients. Henry Cobbe, CFA Head of Research, Elston Consulting  [5 min read, read as pdf]
As we look forward to 2025, it is worth revisiting the themes and predictions of our 2024 outlook “turning the corner” to get a sense of what we anticipated at the time, how this informed our recommendations to UK adviser firms’ investment committees. Asset class performance for 2024 is summarised in the chart above. Our 2025 outlook is published separately. Subscribe to our weekly newsletter to get all our insights to your inbox (for UK financial advisers only) Steady as she slows In 2024, we anticipated a gradual deceleration in the U.S. economy, with markets pricing in the likelihood of a slight recession. In the event, the U.S. economy surprised on the upside. Growth forecasts were upgraded from 1.15% at the start of the year to an impressive 2.6% by year-end. This revision supported robust equity market returns and served as a reminder of the resilience of U.S. economic fundamentals. In summary, a resilient US economy defied expectations. What did we recommend to our clients at the outset and during the year? We took a balanced view between accepting concentration risk (traditional S&P 500) and diversified (active, sector exposures). We also recommended clients lean in to broader US equity corporate landscape via 1) Equal Weight and 2) US Small Caps exposures. By contrast, the UK had that shrinking feeling as regards economic growth, and although out of a technical recession, we are not confident of its prospects relative to the US. Pause before pivot At the close of 2023, we were focused on the Federal Reserve’s pause in interest rate hikes, noting that a rate cut was a question of when, not if. While the consensus view was that the first cut would be announced by mid-2024, we anticipated that the timing would hinge on the performance and strength of the U.S. economy. Indeed, the economy’s resilience delayed the start of what we anticipate to be a rate-cutting cycle to September 2024, when the Federal Reserve finally delivered a significant 50-basis-point cut. In fact, the eventual BoE Fed pivot came a month or two later than we had estimated at the start of the year, but we recommended our clients remain dynamic with regards to duration management. We recommended clients go strongly overweight duration in June as a good time to extend duration ahead of BoE cuts, with Fed following suit, and we saw the additional duration deliver returns on the bond side of the portfolio before attention shifted to debt supply and the UK budget later in the year, which led us to recommending to move back to neutral. The importance of portfolio resilience Our focus on resilience proved vital when it came to navigating the key macro factors in 2024: Growth, Inflation and Interest Rates. For Growth, anticipating a soft landing for the US economy, we highlighted the potential outperformance of cyclical sectors, and momentum, yield and size factors. In the event, momentum emerged as the best-performing factor, with yield and size also delivering strong returns. For Rates, we adjusted duration exposure mid-year to capture the effect of falling policy rates, aligning portfolios with a changing interest rate environment. For Inflation, which remained above target, the inclusion of liquid real assets (but to a lesser extent than in 2022) and shorter duration inflation-linked bonds, ensured continued portfolio resilience. We continue to emphasise the importance of a diversified alternatives exposure from a correlation perspective, not just in name. Our recommendation to consider Private Market Managers and Gold & Precious Metals paid off during the year – as these were the best performing asset classes for the year, outperforming world and US equities. Political and Geopolitical risks In a year of elections, we saw a change in government in the UK and in the US following Trump’s Presidential win. Both have a greater impact on bond yields and currency dynamics than equity markets, in our view. Geopolitical risks remain elevated with the Russia-Ukraine war continuing to grind, escalating conflict and contagion in the Middle East – all at tragic human cost. Conclusion Markets did indeed turn a corner in 2024, with economic growth, earnings and equity market returns outperforming expectations. With 2024 in the rear-view mirror, it’s time to look ahead to 2025. Our 2025 outlook is published separately. Henry Cobbe, CFA Head of Research, Elston Consulting  In this article for ETF Stream, Hoshang Daroga explores the Size Factor and why it might have a role to play in concentrated portfolios.
Read the full article  Trump wins the US elections. What is the impact on the stock market?
In our latest research note for UK financial advisers, we look at:
If you are a UK financial adviser and would like our research for your investment committee, please fill in your contact details.
Trump may be divisive. But his win was decisive. What do the US Election results mean for Equities, Bonds and Alternatives?
For equities, Energy (oil), Financials (deregulation) and Industrials (defence) all fared well following the Trump win. For bonds, the focus remains policy-dependent with continued concerns over the level of US debt issuance and as to whether a Trump term will be inflationary. For alternatives, a decisive win removed some political risk in the world's larges democracy so Gold came off a touch. Listed Private Equity Managers have soared and the clear casualty is Clean Energy. If you are a UK financial adviser and would like our research for your investment committee, please fill in your contact details.  What does the budget mean for pensions?
What does the budget mean for IHT What does the budget mean for the economy, market and taxes Economy: slight upgrade to growth, continued gradual moderation of inflation slightly above 2% target Markets: gilt yields rise slightly whilst digesting spending plans Taxes: a higher burden on employers and asset-rich individuals We discuss this in our research for UK advisers Contact us to get our full analysis to discuss with your clients Apply for a place at our upcoming post-Budget review conference on 13th November 2024  What is the latest outlook for growth, inflation, and interest rates?
What is the latest asset class outlook? See latest asset class performance chart Watch our quarterly outlook webinar 
UK equities have lagged global markets. Henry Cobbe argues that the remaining case for owning them is as for diversification, not for growth.
Read the quote in the Trustnet article  Gold remains a useful diversifier because of its uncorrelated relationship with other asset classes.
As a “liquid real asset” It has inflation-protecting characteristics. Gold provides protection against geopolitical risks and insurance against market shocks. Read in full View all our Gold & Precious Metals research  [5 min read, open as pdf]
 [5 min read, open as pdf]
 [5 min read, open as pdf]
 What is the latest outlook for growth, inflation, and interest rates?
What is the latest asset class outlook? See latest asset class performance chart Watch our quarterly outlook webinar  Hoshang Daroga explains to ETF Stream why he likes S&P500 Equal Weight ETFs going into the second half of 2024.
Read the article Investors should consider allocating three years’ worth of their income needs into money market funds, which “can be used as a liquid source of yield with near-nil volatility”. Setting aside such an ample buffer enables retired investors to put the rest of their wealth to work in higher risk investments to keep growing their pot.
Read the full article in Trustnet |
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