Welcome to your November monthly market outlook from atomos
Now that the political and financial market uncertainty from the autumn Budget on 30 October has settled, we can consider what some of the planned changes might mean for investors.
Overall, it was a Budget broadly in line with market expectations – higher current spending mostly financed by higher taxes; a change in the debt rule and higher debt to support higher capital investment over the long term but not risking fiscal stability. With this already largely flagged by government and priced in by markets, UK asset price moves on the day were volatile but relatively contained.
The most notable financial market mover has been UK government bond (gilt) yields, although some of this is down to sharply rising US bond yields, rather than the UK Budget. Elsewhere, the domestically-focused FTSE 250 stock index initially rose on Budget day before falling back over subsequent days.
Greater spending, higher taxes
Higher levels of current spending by the government (by £48.8bn in fiscal year 2029), relative to the spring Budget plans, is being primarily funded through higher taxation. The Chancellor Rachel Reeves made tax increase decisions of £41.5bn in fiscal year 2029, after taking into account indirect effects of policies. The high tax rises were needed to leave enough room for the government to meet its deficit target, which requires that the current budget must move into balance. The Office for Budget Responsibility (OBR) estimates the budget will move into balance by 2027/28.
This additional government spending will help to boost UK growth in 2025, and we expect the UK economy to now grow at a healthy 1.5% to 1.7% pace over the next year. Higher demand and the indirect effects from policies such as higher employer National Insurance contributions are likely to add about 0.1 percentage point to UK inflation by the end of 2025. These are unlikely to affect the Bank of England’s interest-rate cutting path much. Following a 25 basis point cut this week to 4.75%, we also expect further cuts down to 3% - 3.5% by the end of 2025.
The Chancellor has also opted to change the definition of debt, creating more spending ‘headroom’. She plans to increase public capital investment significantly to £21.6bn by 2029.
The change in the debt rule doesn’t change the real-world UK debt situation – higher near term borrowing and a higher debt-to-GDP ratio is still the reality.
Ultimately, it will be the productivity of these debt-financed capital spending projects – on hospitals, schools, affordable housing and so on – which will matter for the long-term outcomes for UK output, the government deficit, interest payments, and net borrowing.
President Trump makes a comeback
Meanwhile, the American electorate voted former President Donald Trump into the White House for a second term. Republicans have also won the Senate by a narrow to moderate margin. At the time of writing, the House of Representatives remains a close race as votes continue to be counted but looks to be leaning toward a Republican win, although some of the final seats being counted could still surprise.
Capital markets have generally moved to price in a greater likelihood of a Republican clean sweep, on the expectation that this will result in a greater ability to enact campaign promises. In summary:
- The US dollar has rallied against most major currencies with a measure of the trade-weighted dollar up about 1.5%
- Equity markets in general rallied, with most markets up between 1% and 2.5%. Liquid credit markets also rallied, particularly where US-focused.
- Interest rates in the US increased, with yield on a 10-year US treasury bond climbing. European bond yields and UK gilts have been fairly flat.
Overall, we see these moves as being consistent with an expectation that the new US administration is able to progress tax-cut extension policies, a reasonably far-reaching regulatory review and also able to work on developing trade tariff policy. Whether the latter will be a narrow set of policies mainly focused on China, or headline across-the-board measures, is still uncertain.
In the table below, we outline some of the possible impact these policies could have on financial markets and the US and global economies.
Sector in focus: Information technology
The MSCI World Information Technology sector experienced a slowdown in total returns over the past month but remains the second-best performer year-to-date. Demand for AI-related products stayed strong while other areas faced challenges.
Key AI-focused tech companies continued to see favourable performance, with investments in AI boosting cloud and software services. However, some traditional cloud services showed signs of slowing revenue growth. Parts of the semiconductor sector struggled as consumer spending on smartphones and automotive products fell, although demand for AI-related chips remained healthy.
Looking ahead, AI-driven products and services are expected to fuel growth for the sector, particularly in cloud and software. A rotation of economic gains from these companies to the broader market would lead to less concentration in major stock indices like the S&P 500 and MSCI World, where just a handful of tech stocks have been the main driver of returns for some time.
If you would like to discuss any of the topics covered in this month’s outlook, our door is always open. Contact us
Content correct as of publication on 8th November 2024
All investment views are presented for information only and are not a personal recommendation to buy or sell. Past performance is not a reliable indicator of future returns, investing involves risk and the value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested. Any views expressed are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness by atomos. Any expressions of opinion are subject to change without notice.