Political shifts: what does it mean for markets?
At a glance:
- Last year a record number of people across the globe voted for change.
- While new governments are likely to bring in new policies, we expect inflation and interest rates to remain relatively high in the short term.
- The US has opportunities but is also relatively expensive compared to other markets.
In 2024, more than half the world’s population went to the polls and a record-breaking number of incumbents lost vote share.
Over the past 12 months:
- The UK’s Conservative Party experienced its worst defeat since 1832
- Japan’s Liberal Democratic Party, which has governed almost continuously since 1955, lost its parliamentary majority
- India’s Bharatiya Janata Party, led by Narendra Modi, lost its majority but remains the dominant coalition partner
- The US saw Donald Trump and the Republican Party win a clean sweep of the popular and presidential votes, House of Representatives and Senate, defying a much-heralded close election.
Hetal Mehta, Head of Economic Research at SJP, comments: “People have voted for change and, as such, we expect economic uncertainty to continue.” She notes in the case of the US, the economy was a central reason for the Republican sweep. Globally, news reports have also pointed to the economy and inflation as big factors in ousting those in power.
Tariffs and inflation
Will the new parties change things significantly in 2025? It’s hard to say, but Hetal expects inflation and interest rates will remain relatively high, at least in the short term.
In the UK, she notes the ruling Labour party is already pulling a lot of levers. Its much-anticipated budget introduced more taxes, more spending and more borrowing. The UK Government has even redefined terms to allow them to borrow more, she adds.
In the US, President-elect Trump proposed increased tariffs in the run-up to the November election that, if implemented, would have an inflationary effect. Hetal notes: “Typically, every 1% increase in tariffs creates an additional 0.1% impact on inflation. And if it leads other countries to implement tariffs in return the impact could be wider spread than just the US economy. Tit-for-tat tariffs will impact the global economy.”
Although headline inflation has come down significantly since its 2022 highs, core inflation (which excludes food and energy) remains above the 2% target. The memory of the highs from 2022 will also haunt consumers for some time yet, making them wary when it comes to spending, Hetal believes.
Yet, despite the negative areas that bear watching, there are positive indicators that give cause for short term optimism too, such as easing credit conditions. This is why Hetal and SJP’s Chief Investment Officer Justin Onuekwusi believe a recession is unlikely in the near term despite the global economy being in a late cycle stage.
Asset impact
Different phases of the economic “clock” impact asset classes in different ways. To Justin, combining this economic view alongside analysis into how cheap or expensive certain asset classes look can uncover investment opportunities. So, what does he expect in 2025? For one, more volatility.
“Volatility was above average for much of 2024. With new political forces at play and new policies to be introduced – many of which are yet unknown – our view is volatility will likely continue into 2025. But volatility isn’t necessarily a negative,” he says. Periods of volatility can also mean opportunities to invest in areas that become more attractive from a valuation perspective.
Heading into the end of the year, Justin says the US continues to look expensive, especially relative to other global markets. Much of this is due to the heightened concentration of companies that have been leading the market up.
To put the rise of the US equity market in perspective, it’s worth noting that:
- Democrats were among the 2024 incumbent losers.
- The US dominates the equity market. For example, US companies make up some 65% of the MSCI World Index.
- One company alone (an AI tech firm), was responsible for almost 60% of the US stock market return in the first half of 2024.
Given its recent strong performance – boosted by popular tech companies – Justin points out that the US is not only looking expensive relative to other areas, but also has some inherent concentration risks. Leading into year end, investors do not appear paid very well to take on additional risks given only a few countries, sectors and even companies are leading the way. This is leading to opportunities to buy assets that look underpriced, says SJP’s investment team.
For instance, as tech mega caps have dominated, it has created some attractive valuations among the smaller company end of the market. Justin points out, “Small caps look extremely cheap relative to global equities and we think the sentiment is turning towards them as a result.”
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SJP Approved 13/12/2024