In the 12 months leading up to October 31, 2024, the MSCI All Country World Index saw a remarkable increase of 26.3%. US equities were the standout performers, surging by 30.6%, with notable contributions from the MSCI UK (16.0%) and MSCI Europe ex UK (16.7%). Despite a challenging environment for fixed income investments—due to central banks pursuing a slower and more cautious approach to rate cuts than anticipated—the iBoxx gilts index still managed a respectable return of 5.5%. Among major markets, the most significant decline came from Brent crude oil, which fell 16.3%, helping ease inflationary pressures.
Over the past year, while unforeseen developments surfaced, the macroeconomic environment remained relatively stable. Central banks have continued to reduce interest rates, inflation has gradually eased toward target levels, and economic activity has remained robust overall. This steady backdrop has supported corporate earnings, which exceeded expectations, driving the impressive performance of global stock markets. The key question for investors now is whether recent developments will disrupt this dynamic, and if so, how significantly.
In the UK, bond markets reacted noticeably to announced tax changes, with yields climbing higher amid expectations of increased borrowing. However, the response to the most significant fiscal loosening in a generation was measured, especially when compared to the turbulence following Liz Truss's "mini" budget two years earlier. While UK gilt yields have risen to levels near their 2008 financial crisis highs, these movements are largely attributable to global factors rather than UK-specific issues. For instance, the spread between UK 10-year gilt yields and US Treasury yields currently stands at about 10 basis points, a level consistent with September averages and far below the +65 basis points seen in mid-2023.
Globally, attention has shifted to the US election, which holds far-reaching implications for trade, inflation, interest rates, and geopolitical stability. With Donald Trump's re-election and Republican control of Congress, the market has priced in significant fiscal stimulus, including potential tax cuts and increased government spending. In response, US equity benchmarks have hit all-time highs, while the US dollar and Treasury yields have risen. Markets also anticipate higher inflation and government borrowing, reflecting the expectation of looser fiscal policy.
Proposals to cut corporate taxes have boosted the near-term outlook for earnings, with estimates suggesting an increase of 4%-8% in earnings per share. A potential corporate tax rate as low as 15% for domestic production could particularly benefit small-cap companies, which have outperformed large caps since the election. These firms, often tied to Trump's "America First" agenda, remain undervalued relative to large-cap peers. However, small caps face risks from higher bond yields due to their typically smaller cash reserves and higher leverage.
While the initial market reaction has been clear—stocks up, bond yields up, and the US dollar strengthening—the long-term impact will depend on the specifics of policy implementation. For instance, if universal tariffs of 10% are imposed in 2025, inflation could increase by as much as 1%. Trump's policy direction, including appointments to key roles such as Treasury Secretary and Secretary of State, will provide further clarity in the coming weeks. For now, markets remain focused on whether Trump's proposed policies will translate into tangible action, leaving investors closely watching for further developments.