What investors can expect next year

If elections, inflation and (eventually) rate cuts were the big news in 2024, the year it is giving way to will be all about Trump, tariffs and tax. There are new governments in the driving seat in the UK and the US, and while the former is rolling out policies that appear to be doing little more than battering confidence and growth, the latter is recklessly showering American corporations with promises of tax breaks and deregulation.

It is highly likely the US stock market will outperform strongly again in 2025, given the significant tailwinds coming its way, which include not only Donald Trump’s pro-US and pro-business policies but also Federal Reserve rate cuts. That’s not to say everything in the garden will be rosy. Trump’s policies, particularly those on immigration, have the capacity to set off a new inflation surge, even if they are watered down, and could backfire on US tech giants (see The US market is priced for perfection, p48).

That’s one reason analysts think US stocks further down the market cap scale, with high domestic exposure and more attractive valuations, are worth paying attention to. These too will be Trump beneficiaries.

The exuberant expectations and pricing that have driven the S&P’s top dogs to fresh highs this year have left many investors fearful of a bubble. They are right to be wary, because while the high valuations may be understandable, it's not a normal situation. We cannot know when and how this phase will end, and while the US is having its time in the sun, exiting these positions has little appeal. Happily, the best protection in this situation is to ensure you are well diversified not only in your US holdings but also geographically. Most investors this side of the Atlantic can tick this box thanks to their exposure to domestic stocks. The UK has plenty to offer on this front. Its listed companies are high quality but strikingly undervalued, as unloved as its US peers are beloved.

Predators have naturally made the most of this golden opportunity to snap up British bargains. In 2024, 88 companies left the London main market through takeovers and delistings, the same pattern as in the previous year. One change was that bidders were bolder, targeting more companies in the FTSE 250 (eg Britvic, Centamin and TI Fluid Systems) as well as the 100 index (Anglo American and DS Smith). One that resisted being taken over (Anglo American again) managed to see its valuation rise in the wake of the failed bid: if only others would fight harder, too.

More positively, researchers at Peel Hunt report that they expect UK IPO issuance to pick up from the second quarter next year. Indeed, the listing of Canal + this week confirmed that not everyone has given up on the London market. 

But the current situation is likely to persist into 2025 despite measures to stem the flow such as a relaxing of the listing rules. Other moves are urgently warranted such as ending stamp duty on share trades, and incentivising pension funds to put a bit more of UK taxpayers’ money into undervalued domestic stocks. We need to be less bothered about US style remuneration pay deals for UK executives, and to demand progress on access to research that will help put companies in the investment spotlight.

Meanwhile UK economic weakness means the door remains wide open for more painful tax hikes. The year is ending with contracting GDP growth, along with a fall in employment numbers, with the blame pinned on the chancellor’s avaricious October Budget. In the wake of Rachel Reeves’ raid on businesses, economists revised down their predictions for growth in 2025. Capital Economics now estimates growth in 2025 will be 1.4 per cent, down from 1.6 per cent.

Rate cuts could help here but the view at Pantheon Macroeconomics is that the Monetary Policy Committee will be dealing with two new inflation shocks - the Budget and Trump. Tariffs are the biggest risk: trade wars would mean rising prices across the board. 

How vulnerable the UK economy is to Trump’s threat depends on if and how quickly these duties are implemented, and if he targets all countries or chooses to negotiate deals. Economists point out that the UK looks somewhat less vulnerable than Europe given that its exports are services- rather than manufacturing-led. If tariffs are applied to UK trade, the view of Kallum Pickering at Peel Hunt is that we should accept the hit, hope that sterling depreciates to soften some of the shock to export demand, and then work at negotiating a deal with the US. 

Our next issue will be published on 3 January 2025, featuring our Ideas of the Year. I wish each and every one of you a happy and peaceful festive season and good health and prosperity in the new year.