Market Crossroads: Unwrapping Tariff Uncertainties & Policy Shifts
Macro & Markets
The re-election of Donald Trump has introduced significant uncertainty, particularly regarding potential tariff escalations. Proposed tariffs on Canadian, Mexican, and Chinese imports have reignited fears of a trade war. While the UK may avoid the brunt of these measures, broader global trade tensions could weigh on market sentiment.
China’s shift to an “appropriately loose” monetary policy and pledges to expand domestic demand signals a more aggressive stance to support growth. This policy shift provided optimism for emerging markets, which reacted positively to the initial announcement. Following the inevitable pullback, emerging markets have tracked mainly sideways over recent months and remain up 10.7% year to date.
In developed markets, however, the election has, so far, had a positive impact. Global equities were up circa 6.5% in November, which leaves them on track to deliver the highest returns since 2016. UK equities offered reasonable returns of circa 2.55% in November. Though the initial market enthusiasm surrounding the budget has dissipated, the UK market has remained positive since the announcement and is up 11% year to date.
Despite performing well over recent weeks, European equities remain the laggards for the month and, indeed, for the year. The combination of increased political and geopolitical turmoil, dubious economics, and the makeup of firms that populate the European index has left European equities returning almost half that of the UK this year. The ECB is anticipated to reduce rates in Europe, reflecting ongoing economic challenges. Meanwhile, French bond yields briefly rose above Greek yields, highlighting Greece’s remarkable recovery since the Eurozone debt crisis.
Despite rallying in recent weeks, bonds continue to struggle to get their heads above the water at an index level. Posting a return of 0.18% this month and -1.58% for the year. However, things look markedly different when assessing the performance of actively managed bond funds. For example, the fixed income portion of Portfolio 4 delivered 1% this month and has posted a return of 4% for the year so far, demonstrating that the fixed income situation remains incredibly nuanced and highly dependent on positioning.
The oil market remained surprisingly stable despite ongoing Middle East tensions, with prices hovering near the lower end of their recent range. OPEC’s decision to delay planned output increases added to the subdued outlook for oil prices. Meanwhile, cryptocurrency markets saw significant activity, with Bitcoin reaching new highs amid renewed investor enthusiasm.
Performance & Positioning
All IBOSS portfolios delivered a positive return for November, and the majority remain ahead of their benchmarks since the market lows in 2022. Much of the performance over the period continues to be delivered through fund selection, as we see a wide variance in returns across funds and sectors.
All the IBOSS portfolios continue to deliver attractive risk-adjusted returns across most time frames, with first or quartile Sharpe ratios for the Core/ Passive ranges YTD. The lower-risk portfolios have performed exceptionally well, outperforming their benchmarks for the year and with top-quartile Sharpe ratios despite the more challenging market environment for lower-risk portfolios since the bond crisis in 2022.
Outlook
We believe markets are at a crossroads as they assess geopolitical developments, inflation trajectories, and central bank policies. The coming weeks will be critical, with US inflation data and central bank meetings likely to shape market directions. Additionally, China’s detailed policy actions will be closely watched for signs of tangible economic support.
While volatility may increase as the year-end approaches, opportunities remain for longer-term investors. We are cautiously optimistic; bond yields look to be stabilising, and many areas of the global market look relatively cheap. Large institutions like Vanguard and Goldman Sachs continue to warn investors that long-term returns in areas like the US may be underwhelming for the next 10 years. However, we caution investors against writing these areas off entirely, as they could continue to get more expensive for some, particularly with Trump’s support.
Overall, we remain well diversified across asset classes and sectors. Though US equities make up the most significant position in our equity allocation, we are well exposed to other, more attractively valued areas of the equity market coming into next year.
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