2025 - The Year of Resilience

Within the space of less than 45 days we have touched upon: 

• A Big Labour budget
• A Big US election
• Edgy bond markets as debt builds up
• A bubbly stock market
• Potential groundbreaking bank deregulation.

We have described a stock market in search (but not fear) of correction, in a world that gets more wobbly and where policymakers, not waiting for AI to deliver, are searching for economic growth in increasingly risky places. A world where American leadership and exceptionalism are turning to reticence, causing tectonic shifts in the global geoeconomic balance. Big changes appear to be the incoming US administration's explicit and stated goal, and big changes in the US mean risks, opportunities and big changes everywhere else. Policymakers will likely face inflation as a result of the implementation of their policies, but they also can credibly hope for a rise in real output.

Amid all the noise, the forecasts, the opportunities and the danger signs, what may be missing is the “so what? Where are you taking me?”

So What? Resilience

So today let’s take advantage of the half-week during US Thanksgiving and take stock. Focus on what investors and businesses should do in this environment.

What are the implications of an increasingly non-linear world that will likely not be made any smoother after the official change of government in the United States?

We believe the big takeaway so far is: Change will accelerate, some of it will be good and some of it will be a miss. This is not the linear central bank-driven economy. It is the Great Reset, after a century of the post-WWII global order. Being in the right place at the right time cannot be the foundation of a strategy, simply because the range of possible outcomes is increasing at an exponential pace. In other words, successful bets will pay off in spades, to be sure, but “getting it just right” in this world that we describe is a very tall order (which is why there is a big payoff for the few lucky ones).

So, for those who do not feel like gambling, what is left is a preference towards resilience.

What Resilience Means for Investors

In a world so unpredictable, looking for success based on a “correct prediction” will be very difficult for investors, but that does not mean that they still cannot come out on top.

The key is to:

1. Get, or stay out of more debt, especially if they plan to refinance it. We do not mean holding fixed income but rather making sure they do not leverage their investments more than they can afford to if the environment gets riskier.
2. Do not rely on the newspapers for information.

A world so abundant in information will be very difficult to make sense of. Different experts will reach different conclusions. So, a seasoned investor needs to minimise the information overload from many sources and instead focus on information from a few trusted sources.

For non-professional investors, this means becoming more attentive to the words of one’s trusted adviser. If someone wants frequent information on the running of their portfolio, then they should make sure they meet regularly and make sure that their wealth portfolio (as a total, not just stocks and bonds) is resilient. What does this mean? Ask the following questions:

1. Is my portfolio well diversified?
2. Am I undertaking too much concentration risk (for example US tech equities)?
3. Am I positioned to withstand a correction due to high valuations?
4. Is my fixed income exposure protective in case bond vigilantes start targeting the EU, or worse, the US?
5. Are there enough diversifiers in my portfolio?

What resilience means for businesses

For business leaders and board members, resilience means increased responsibility. This can also come in the form of asking the right questions.

1. Is my company’s leadership (CEO, CFO, Board) aligned with the notion of resilience?
   1. Are the right people, internals and externals, in the right place?
2. Is my company’s capital structure resilient?
   1. Will it need to refinance debt soon, at possibly higher levels?
   2. Will it need to raise money soon, and if so, what is the most advantageous market to do so?
3. Is my company’s operational structure resilient?
   1. Are my supply chains concentrated enough to withstand disruptions in global trade?
      1. Are my agents knowledgeable of their respective markets and well-positioned for a fast-paced political and economic environment?
   2. Are there contingency plans to get parts/equipment/services from alternative vendors quickly should the need arise?
   3. Can my technological infrastructure withstand increasingly sophisticated cyber-attacks?
4. Is my company keeping up with new technologies in a sensible and profitable way?

Ultimately, this is a time to consolidate, think about the future and design responses. A time to tend to fortifications, instead of brazenly expanding towards one direction unless one has clearly mapped out that road ahead. The times will test the resilience of investors and businesses, likely more than their vision for the future or the accuracy of their predictions.

George Lagarias – Chief Economist

Market update

Global equities rose by +0.8% (in local terms) and US equities increased by +1.1% (local terms) last week as news about potential tariffs caused intraday volatility. In GBP terms, US equities fell by -0.6% (in comparison to a rise of +2.4% the previous week) due to exchange rate fluctuations. US large cap stocks rose for the 7^th consecutive session and reached record intraday highs. Emerging markets performed worse than developed markets, seeing a -2.2% decrease in Sterling terms. The UK and EU had increases of +0.4% and +0.3% respectively, as the rate of inflation in the eurozone was reported as having increased from the previous month.

10-year government bond yields carried on their fall since the election, with yields being around 4.4% across the UK and US for the last week. The US 10-year yield fell by -23 basis points, while the UK 10-year yields fell by –14 basis points.

Gold and oil had significant drops of -3.8% for gold and a greater decrease of -6.1% for oil. The cause for the drop in oil is considered to be the signs of deescalating geopolitical tension in the Middle East

Macro news

The annual inflation rate in the eurozone was 2.3% in November, up from 2% in October. This is the first time since August that inflation has exceeded the European Central Bank's target of 2%. However, the relatively modest rise is unlikely to prevent the ECB from cutting interest rates again at its policy meeting on 12 December.

The US personal consumption expenditures (PCE) price index rose by 0.2% in October, remaining unchanged from September. The 12-month rate rose to 2.3%, accelerating from 2.1%. Excluding the volatile food and energy components, the core PCE rose 0.3% MoM and 2.8% YoY (up from 2.7% in September).

Mortgage approvals for the purchase of new homes continued to rise in October, increasing by over 2,000 in the month to 68.3k. This is an increase of 8.9% over the last three months and a 55% increase since September 2023. Lower interest rates and higher real incomes have boosted homebuyer sentiment. The quoted rate for a two-year fixed-rate mortgage at 60 per cent loan-to-value fell to 4.2% in October from a peak of more than 6% in August last year.

The week ahead

Some of the upcoming market events which could influence sentiment and market movements include: Caixin Manufacturing PMI (CN) and ISM Manufacturing PMI (US) on December 2; JOLTs Job Openings (US) on December 3; GDP Growth Rate QoQ (AU), ISM Services PMI (US), Fed Chair Powell Speech (US) on December 4; Balance of Trade (AU, CA), Ivey PMI s.a (CA) on December 5; Unemployment Rate (CA), Non-Farm Payrolls (US), Unemployment Rate (US), Michigan Consumer Sentiment Prel on December 6; and Balance of Trade (CN) on December 6.