In our latest investment outlook for 2q25 outlook, we discuss the impact of America's Trade War as part of Trump's America First policy.
Subscribe to our weekly newsletter to get all our insights to your inbox (for UK financial advisers only)  Subscribe to our weekly newsletter to get all our insights to your inbox (for UK financial advisers only)
Watch our 2025 Outlook in full What do we mean by "Zombie Inflation"? “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 is past the peak but has not gone away 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. Looking at rolling inflation for historic performance hurdles We look at rolling 5 year inflation (UK CPI) as smoothed measure to set hurdle rates for portfolios for past performance evaluation. The rolling 5 year data has not peaked yet (see chart) - it will take time for the inflation shock to wash out. Looking at breakeven inflation rates for expected return hurdles We look at 5 year breakeven inflation rates (UK BEIR) to set hurdle for target returns for UK investors. The long-term average for 5 year BEIRs is approximately 3%. In this respect forward-looking inflation expectations are also down from their peak >4%, but still high at 3.6%. How can advisers build in inflation resilience to portfolios 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. How can advisers find out more about investing in inflationary times? To find out more see all our Insights on inflation investing https://www.elstonsolutions.co.uk/insights/category/inflation  Subscribe to our weekly newsletter to get all our insights to your inbox (for UK financial advisers only)
Watch our 2025 Outlook in full America First means continued exceptionalism The Trump administration's "America First" policy could help 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. Outlook for US economic growth remains robust 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. Remapping of European energy landscape boosts US LNG Whilst the Russia-Ukraine war and related sanctions is bolstering the US Energy and Defence sectors, the remapping of European energy supply chains from piped Russian gas to shipped US LNG is an important shift from an energy security perspective, but the resulting inflation for manufacturers is hollowing out European industry - impacting the UK and Germany in particular. UK equity market valuations gap remains 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. US ecoomic growth, earnings growth, and valuation multiples have driven market growth 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. US continues to set the pace for global equities 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. 
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  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  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  Our 2q24 Outlook "Path to recovery": takes stock of the markets as asset prices recover. Our full Outlook is avilable to our adviser clients.
Watch the Webinar  In our upcoming quarterly investment outlook, we update our key themes for 2024. Please join Hoshang Daroga (Elston Consulting) and Natasha Sarkaria (BlackRock) for this webinar.
Our key themes are: 1. Growth: Steady as she slows 2. Rates: Perfecting the pivot 3. Inflation: Ensuring portfolio resilience Our full Quarterly Investment Outlook is available to our clients. Watch the Webinar |
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