The Big Three (July 2024)

1 . Trump Ascendant

The US presidential election in November is presenting the world’s most powerful electorate with an extraordinarily stark choice – between moderate liberalism and protectionist hard-right isolationism. Until recently the race was a toss-up, but the twin events of President Biden’s failure in the presidential debate and the failed assassination attempt on former President Trump have tipped the odds decisively in the favour of the Republican. Markets have, on the face of it, received this news with calm, although under the surface there are some important shifts. The derivatives markets give us subtle hints that investors believe President Trump’s economic policies will be significantly more inflationary than President Biden’s, perhaps leading to higher interest rates for longer. President Trump’s ascent in the polls has also coincided with a recovery in US smaller companies, with investors perhaps betting he will stimulate the domestic economy.

2 . A small island of calm

Following a decade where the turbulence of British politics was the focus of much international ridicule, it appears the election of a moderate Labour government with a huge majority has made the UK an oasis of centrist calm at a time when both in the United States and in Europe there is evidence of electorates moving towards extremes. Such stability could prove helpful for our capacity to attract renewed capital internationally; offering a predictable policy path in the years ahead with which companies can plan their futures in the UK. However, we start from a low base with international investment in the UK lagging badly behind other competitors. The incoming chancellor Rachel Reeves faces a tall order to turn events around. It may be a stretch for the new government to claim the credit for the improving growth and inflation environment that we are now seeing in the UK, but she will no doubt take any help she can get.

3 . A breadth of fresh air

The key challenge for stock market investors over the past year has been that whilst the stock market recovery has been powerful, it has also been very narrow. A small number of the largest US companies have produced returns significantly ahead of the rest of the market. There is some early evidence in recent weeks that this trend could be reversing, with smaller companies beginning to deliver performance.  The key trigger for the move was a US inflation number coming in lower than forecast. Should this trend continue, we must carefully monitor and respond to this process to ensure that portfolios properly participate in the next phase of the recovery.