Pete Wasko, Senior Portfolio Manager, Copia Capital

For professional advisers only

As we near the end of a year dominated by political upheaval, Pete Wasko, Senior Portfolio Manager at Copia Capital, looks back over the last twelve months and considers how events in the US and UK will impact investors in 2025.

A recap of 2024

In equities, one of the more notable aspects of this year compared to 2023 is that while the US continues to dominate, it hasn’t been the only game in town. We are seeing more breadth of performance across regions: the UK, EU, Japan, and more recently Emerging Markets, have all been performing better; and even previously depressed areas, e.g., small caps, have shown signs of life.

It’s been a similar story in bonds, where after a couple of tough years – particularly for government bonds – performance has improved, with corporates leading the charge.

Elsewhere, interest rate expectations have benefitted real estate and infrastructure; and gold has proved an outlier, partly driven by geopolitical concerns but also accelerated by central bank purchases. Finally, with rate-cutting having commenced across most regions (with Japan the notable exception), we expect it to continue into 2025.

UK Budget

In the UK, while Rachel Reeves’ first budget has dominated the headlines, the market response has been relatively muted.

A key issue is the raising of employers’ NI contributions (from 13.8% to 15%). The concern here is how this is passed through. It could impact employment levels, or if it’s leads to higher prices, it will also result in higher inflation.

However, growth predictions have been (relatively) rosy at around 1%; and while inflation continues to be sticky, rising by more than expected in October due to increases in energy bills, it is in a considerably better place than it was a couple of years ago.

Overall, market impact has been relatively subdued despite surrounding negativity. Compare and contrast with the FTSE 250 falling nearly 10% in the wake of Liz Truss’s mini budget. Back in 2022, UK gilts fell off by over 15% and corporate bonds by 9%; today, while gilts have sold off modestly, the picture is not nearly as concerning.

US Election

We also need to consider the major event of the year: the re-election of Donald Trump.

A few key policy areas are now front-and-centre. It’s anticipated that the top rate of tax will be kept at 37%, while Corporate Tax could be lowered, from 21% to 15%. This is likely to be a positive growth engine, putting more money in the hands of individuals, and higher profitability at corporate level. De-regulation in oil and gas and financial services could also to be a net positive for business. And despite the record deficit, fiscal policy is expected to remain expansionary. Austerity is very much not on the cards.

Tariffs, however, may well be the key issue, and something of a wild card. The best case scenario is they are used sparingly as bargaining leverage in trade negotiations; worst case, 10% universal tariffs, with a punitive 60% on Chinese goods. The impact on inflation, and indeed growth both in the US and globally, will depend on how this plays out.

From our perspective, the markets had been pricing in a Trump win, but since confirmation we’ve seen significant rallies in areas that benefit from deregulation or have a more domestic bias: for example, US banks and US small caps have particularly outperformed. Interestingly in a poll among around 20 advice professionals on a recent Copia update, almost half (48%) felt that Trump’s policies would be beneficial for UK investors, while 38% thought they would be negative.

In terms of areas of concern, the debt/GDP level of 120% represents a record high – spending is at a level not normally seen except in recessions or periods of war. Interest payments have ballooned to over $1 trillion. For context, this comfortably exceeds total US defence spending. This is in part a driver of growth but will eventually need to be addressed. Whether a Trump administration will do so remains to be seen.

How the US affects the UK and EU

So what’s the likely impact of the Trump administration on the UK and Europe?

Tariffs are the obvious issue. If they are used as leverage, it may be more concerning for the more bureaucratic EU, whereas the UK could potentially benefit from an ability to negotiate more effectively, even around a worst-case 10% gambit. Furthermore, 17% of US imports comes from Europe compared to just 2% from the UK, meaning the UK may be less impacted by any increase in tariffs.

A potential downside offset may be the strengthening of the US dollar over the last month or two, which obviously benefits non-dollar exporters.

Investment outlook

Looking forward, while for the last couple of years our portfolios have had higher allocations to short duration corporate credit, more recently we’ve been transitioning towards market weight duration for fixed income. In equities, we remain cautious on US large cap growth stocks, seeing greater opportunity in value and smaller caps.

Finally, we are bullish on the UK. Valuation multiples are lower than any other region, and that’s reflected in the corporate community with record share buybacks, and significant M&A activity. In short, the smart money sees a lot of embedded value in the UK, with our particular preference being for mid-caps. Overall, even given the pessimism built into the UK, if more institutional flows can be attracted back in, this could be a continuing theme.

Find out more

If you’d like to hear more of our market insight, you can find recordings of our previous webinars and sign up for future events on the Copia website.

Please remember that the value of investments and the income from them can fall as well as rise, and you may get back less than you invest. Tax treatment depends on individual circumstances and may be subject to change in the future.