As temperatures drop below freezing, we do indeed appear to have been given a bit of a cold shower in the last few weeks driven largely by the fervour over Trump’s convincing US election win.
So, what’s been going on and what can we expect in 2025? Here are my thoughts. At the end, you will find a link to some additional analysis of Trump 2.0.
Higher for longer
Having remained steady through most of 2024, the first impact of Trump’s election victory has been to push long term bond yields higher in Western economies. The UK 20-year rate has jumped over 1% since its pre-US election low point.
At close to 5.4%, these are the highest long term bond yields since the summer of 1998. They bring us firmly back to the yields we had before the Great Financial Crisis of 2008/09. It has only taken 15 years, but we finally appear to have fully recovered from this world event. Don’t expect to see mortgage rates less than 2% again any time soon.
Currency movements
‘US exceptionalism’ are the buzz words now to describe both the dominance of the US economy and US businesses in the world economy and the continued trend of global investors wanting to invest in the US economy over all others. To see this in action, look no further than the US Dollar/Sterling exchange rate.
There has been an 8% appreciation of USD assets in Sterling terms in just 3 months. Some in the media will put blame on the negativity around our new Government (coming both from within and from the press) for this decline in Sterling’s US Dollar purchasing power. However, in the same timeframe Sterling has been flat against the Euro and has appreciated slightly against the Japanese Yen. This is most definitely the Dollar rising, not Sterling falling.
This is not helpful to Trump and his MAGA campaign – he wants the Dollar to fall to make US goods more exportable.
Irrational exuberance
These were Federal Reserve Chairman Alan Greenspan’s words in 1996, and it’s worth reading them in context just to remind ourselves:
‘Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?’
Source: The Challenge of Central Banking in a Democratic Society, 1996-12-05
Greenspan was talking at a time when inflation finally started to come under control after the 70s and 80s. Stock markets around the world were motoring, apart from Japan’s, which peaked in 1990 and has taken 35 years to recover. Greenspan’s concerns did not come home to roost for another few years when the dot com bubble finally burst at the turn of the century. But burst it did!
Since the Trump election result, Bitcoin is up 40% and Tesla shares a whopping 65%. They had doubled in value at one point. Of course, there is zero intrinsic value in Bitcoin we can only speculate. Tesla currently sells electric cars, and the number of cars Tesla is selling is now falling. The whole valuation of Tesla is predicated on Musk’s genius and Tesla’s ability to create valuable revenue streams beyond those from selling cars in energy technology, driverless vehicles, and robotics. As the price rises, Tesla shares become more and like the price of Bitcoin – it is becoming more and more speculative and less based on intrinsic value. Irrational exuberance, perhaps.
How have we fared in all this?
These moves did hurt our portfolios in the last few weeks of the year, but we still managed to see out the year with healthy gains in 2024 and we have already seen some of the damage repaired.
In our fixed income portfolios, we had added some longer-term bonds which hurt a bit, although we were mostly in short duration which suffered less. According to FE Analytics, and before Tideway’s fees, Tideway’s Balanced Fixed Income portfolio ended up +8.4% last year. The average UK Gilt fund ended -3.7% for the year, losing 6% in the last 4 months. This is a good example of the challenges faced by advisers trying to explain risk! Gilts are perceived as low risk, but in the last 4 months of 2024 at least, a Gilt index fund will have been significantly higher risk than our managed corporate bond funds.
On the same basis, our Equity Blend portfolio made 11.4% last year, just a percent lower than the average IA Global equity fund. Both returns were put in the shade by the US index return. Our holding in Fidelity’s US Index fund, buoyed by the rise in the US Dollar, made a whopping 27.2% and was our top performing fund, although Artemis Global Equity Income came very close at 26.8%.
We caught some of these outsized returns. Overall, all our portfolios have delivered good, positive returns well ahead of inflation after all fees. So, a decent year.
Where do things go from here?
In fixed income, that’s relatively straight forward. The rise in yields is good news for our 2025 predicted returns. Of course anything can happen, but checking in with our managers, confidence is high for another high single digit year. If anything, we think rates in the UK might be getting a bit too high and our macro advisers TS Lombard are suggesting more base rate cuts in the UK could be on the cards. Regardless, we are still likely to be near 4% by the end of this year.
In equities, as ever, it is much tougher, indeed impossible, to predict short term returns over one year. Interestingly, we spotted two heavyweights of the finance industry backing our view not to go all in on US Equities. In recent weeks both Goldman Sachs and Vanguard have come out with predicted returns for US equities for the next ten years. Vanguard’s prediction was between 3.8% and 4.8% per year and Goldman’s even lower at 3%. Vanguard’s forecast went on to suggest these would be roughly 50% of the returns expected from world equities excluding the US. Incredibly, these forecast returns are both lower than the 4.84% p.a. we are now guaranteed on a 10-year UK Gilt.
US exceptionalism and the demand for US shares has driven valuations of US equity indices, not quite to record levels but getting close. Research we have seen in recent weeks shows that on a range of valuation metrics, US indices are getting within 5% of record valuation levels. Additionally, there is the currency risk when investing completely in US dollars – will Trump succeed in weakening the Dollar? This would be a headwind for UK investors investing in US equities.
Like Greenspan, we may be early in our concerns. But given the responsibility on us to manage our client’s irreplaceable capital, we think it’s right not to be too greedy and resist the FOMO at this point.
We will be publishing year end valuations next week and there is a great, detailed report included with these from Nick Gait and our investment team looking back and forwards at the portfolios and the composite funds. This will also be the topic of our upcoming webinar on 3rd February, which you are encouraged to register for – click here to do so.
What geopolitical risks could affect markets in 2025?
Finally, this week we are also pleased to provide some insight from our long-standing client Stephen O’Sullivan, looking at geopolitical risks and Trump’s second term. Stephen had a wide ranging and very successful career in banking in various parts of the world. Whilst he has allegedly retired, he has dazzled and entertained us on two occasions in the last two years talking about issues in Hong Kong and, more recently, Russia and the war with Ukraine.
As we sit here in the UK, bombarded by the UK media, it’s never been more important to get a global view of what’s happening outside, and from outside of the UK. When Stephen suggested he might be able to provide some valuable insight I jumped at the chance of putting him to work. I hope you enjoy it as we have.
The content of this document is for information purposes only and should not be construed as financial advice.
Please be aware that the value of investments, and the income you may receive from them, cannot be guaranteed and may fall as well as rise.
We always recommend that you seek professional regulated financial advice before investing.
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