Nutmeg investor update: December 2024
The Nutmeg team
5 min
In November, investors saw the outcome of the US election as positive for US stocks, but it was a different story for emerging market equities.
At a glance
- Equity markets gained in November, led by strong performance from US stocks.
- Bond markets – both government and corporate – also rose.
- Emerging market equity markets were weaker overall.
- Investors expect the re-election of Donald Trump as US President will support US assets, but that the new administration's policies may also slow the pace of interest rate cuts.
What happened in financial markets in November and why?
Global equity markets finished November in positive territory, with gains led by US equities which produced one of their strongest months of 2024. Shares in large US companies – also called "large cap" equities – rose 5.9% in dollar terms, while smaller companies – or "small caps" – had a particularly strong month, rising 10.2%. The driver? A republican clean sweep in the US election, offering investors optimism over the potential for further US economic growth, coupled with tax breaks and deregulation under the new Trump administration.
In the rest of the world, Japanese and UK stock equity markets delivered more muted returns in November. Japanese stocks fell 0.8% and the UK FTSE 100 gained 2.6% in local currency terms. European markets declined, as investors digested the potential ramifications of the incoming Republican administration – specifically talk of trade tariffs – against a backdrop of already weak industrial activity.
Emerging markets also delivered negative returns, falling 3.5% in November, in dollar terms. China was amongst the largest losers, but most major emerging market stock markets ended the month in negative territory. The exception was India, where stock markets rose slightly in November and where domestic economic activity indicators remain strong.
In bond markets, corporate bonds largely mirrored the atmosphere in equity markets, with investors apparently happy to take on more risk. This was reflected in the performance of riskier US high yield bonds, which delivered returns of 1.1%, and UK Corporate bonds also finished the month having made gains. Government bonds started the month on weaker footing. Election and inflation uncertainty dominated headlines, however, developed market government bonds finished November with returns of around 1.7% in the UK and 1% in the US.
What are the investment implications of Donald Trump's re-election in November's US election?
It was clear from the market reaction that the re-election of Donald Trump is expected to create distinct winners and losers, yet the President himself is only part of the story. Critically, the election result has offered Republicans control of not just the White House, but also the Senate and House of Representatives. This should make it much easier for the new administration to enact policy. This "clean sweep" was a possibility, but far from a certainty, and it heightened the market reaction to the election news.
Sectors and stocks perceived to benefit from potential policy moves rallied, such as energy and banks, and investors shifted funds to US dollar denominated assets at the expense of global peers. Meanwhile, assets that are sensitive to trade and tariffs, such as European and emerging market stocks, fell, while their currencies weakened against the US dollar as investors priced the potential for meaningful tariffs. In Europe, an unstable political picture in Germany and France only added to reasons for investors to seek US assets.
Away from stock markets, expectations of looser fiscal policy (the way the government spends and raises money) including the potential to extend tax breaks brought in during Trump's previous presidency, should provide room for continued US economic growth. That has, however, kept bond market investors wary, as concerns grow over the extent of the administration's plans to increase borrowing, and the potential for future tariff-induced inflation pressures. Consequently, the number of expected interest rate cuts from the Federal Reserve over the coming 18 months has fallen post-election.
We anticipate over the medium- to long-term, the US will benefit from a resurgence in domestic investment at the expense of the rest of the world, notably emerging markets. This was also our expectation for the outgoing US administration, but we believe this dynamic may unfold in a less smooth and predictable manner than was the case.
How are tariffs expected to affect emerging markets and global trade?
The Nutmeg investment team currently holds a smaller allocation to China than our long-term benchmark, given the challenges we feel the Chinese economy faces from both an internal consumption, and external trade perspective. But for much of 2024, we have held a more positive view of the outlook for wider emerging markets given what looked like ongoing recovery in global trade volumes and the demand for durable goods, and cheaper market valuations.
That optimism, however has dimmed somewhat over the last quarter. The early-stage recovery and growth signals seen in many emerging market economies at the turn of 2024, are now showing signs of slowing. At the same time, broader emerging markets are facing a number of threats to their outlooks from both an economic and market perspective. The twin effects of a stronger US dollar, alongside the potential for meaningful trade tariffs are reducing our confidence in the extent to which global trade can recover from its post Covid lull. India is a notably bright spot in terms of domestic growth, but valuations do look stretched after a long run of outperformance, according to analysis by the Nutmeg investment team.
The situation is far from desperate, but with manufacturing sectors across developed economies in contraction, and the possibility of tariffs imposed by the global economy's largest importer of goods, the investment case is likely to weaken. Clearly China, where we have a small allocation, will feel the brunt of these policies, but many other major emerging markets, particularly Mexico and those in South East Asia with strong trade ties to China, are also unlikely to escape unscathed, and face a more uncertain economic and market outlook post the US election.
About this update: This update was recorded on 3 December 2024. All figures, unless otherwise stated, relate to the month of November 2024. Source for figures: MacroBond, Nutmeg and Bloomberg.
Risk warning
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past performance and forecasts are not reliable indicators of future performance. We do not provide investment advice in this article. Always do your own research.