Tatton Outlook

2025

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 TATTON INVESTMENT MANAGEMENT
TATTON OUTLOOK 2025
Overview

Capital market outcomes are hard to call with any certainty.

The big ‘known unknown’ is Donald Trump’s second
presidency, in which he or his allies have once again promised to cut
taxes – both income and corporate – slash regulation, impose sharply
higher import tariffs and gut government spending. Opinions are
divided on how likely a one-for-one implementation these proposals
are, the impact of those policies and how other policymakers might
respond. As before, the prevailing wisdom is that we should take
Trump seriously, but not always literally.

Despite those disagreements, markets investors have bought into since (at
in general display confidence that the US least) the global pandemic.
economy will continue to outperform
the rest of the world, judging by the Professional economist forecasts are
relative pricing premium of US risk less positive than the market but have
assets. The rationale is that Trump helps improved since Trump’s election and
American businesses with tax cuts, and tend to underestimate such changes.
hurts everyone else with tariffs. This is Nevertheless, perhaps there is a mild
reinforcing the US exceptionalism that warning here.

Trump tariff pledges would top depression-era levels

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We think markets might be a little why global trade volumes did not fall in 2024, markets. Improvement, if it comes, will be work against the world’s largest economy. If
overconfident. Potential risks to US assets look but we are already seeing indications that it is driven by policy. Global investors are still the Federal Reserve has to maintain tighter
underappreciated, as do potential benefits to cooling down. unsure of Beijing’s willingness or ability to monetary policy than other central banks, due
other major regions. It is not that we do not support its domestic economy, but Trump to stronger growth, that would decrease US
believe markets’ ‘America first’ story, just that Much has been made of the potential inflationary tariffs make supportive internal policies more companies’ short-term advantage. And if the
others arguably believe it too much. Indeed, we impacts of tariffs on US consumers and likely. Meanwhile, the European Central Bank dollar is too expensive to use in global trade, that
expect US growth to outperform major regions businesses but, in terms of the global economy, is expected to be more accommodative than would hurt the long-term advantage the US gains
like Europe and China for at least the early part the reduction in trade volumes could well prove elsewhere, due to poor European growth. Both from controlling the world reserve currency.
of next year. This will be reflected in stronger disinflationary. Shipping costs are falling and economies are starting from low bases, making
near-term profits and, in all likelihood, stock businesses have built up their inventories. Those it more likely that policy will boost growth. The latter would be particularly bad if it coincided
market outperformance. But beyond that, the forces could push down prices in the short-term with US fiscal deterioration. Many fear that
outlook is clouded by uncertainty. – perhaps even for US consumers. This is part of a broader story of global could happen, thanks to Trump reducing the tax
economic divergence. Chinese growth has been base. On that front, markets were calmed by the
Trump’s proposed tariffs represent the biggest Trade problems are playing out against the decoupling from the US for years, and in 2024 appointment of Scott Bessent and promises to
threat to global trade in 2025. The president- backdrop of an extended global manufacturing the same could be said of Europe. Trump tariffs cut spending – but fiscal risks remain.
elect campaigned with promises of tariffs of at recession. Chinese manufacturers overproduced will intensify that divergence. While US growth
least 60% on Chinese imports to the US, and 20% in the last two years, creating a global outperforms, that is likely to push up the value This does not represent a bad environment
on all other trading partners. The consensus is, oversupply which pushed down goods prices of the dollar – from an already high level. That, for investors, just an uncertain one. There is
however, that those numbers are a negotiating but hammered manufacturers everywhere. in turn, could hasten the use of other currencies, a broad range of plausible scenarios, some of
tactic rather than a policy outline – a sentiment This severely slowed growth in Europe and like China’s renminbi, for global trade. which are very positive for risk assets, and some
backed up by comments from Trump’s Asia. China’s recent stimulus announcements of which are not. Markets are inclined towards
nominated treasury secretary Scott Bessent are designed to support domestic demand, but Amid this divergence, bond investors are likely the positive view – and there is a good chance
– but anything remotely close to those figures there is a long way to go. Europe is an arguably to view more stable governments and sound they are right. But there are risks and rewards to
would dwarf the levies imposed in Trump’s first worse position, due to its high energy costs internal policies (whatever they may be) as less be found across most regions and asset classes.
term. Those first-term tariffs transformed global and dependency on machine and car exports. risky, and reward them with lower bond yields. Diversification is crucial, now more than ever. As
trade patterns, and the second round would do The bloc’s woes are compounded by political Despite current political upheaval in France and ever, we will stick to that principle in 2025.
so again. instability in its two largest economies. These German, that could be a positive for European
problems will continue into the early part of bonds, whose governments generally have
Global trade actually increased in recent next year at least. more manageable debt than the US.
months – particularly Chinese exports to the
US – almost certainly in anticipation of tougher As we move through the year, though, Chinese Markets are betting that global divergence will
trading conditions come January. That rush is and European growth could improve – hopefully benefit the US – and they are probably right
leading to better profits and stronger stock in the short-term. But divergence could also

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Regions Question (2) comes in two parts: how the If Trump constrains immigration and hikes tariffs
Federal Reserve will respond, and how foreign before tax cuts and capacity-expanding supply-
governments will respond. Even in the best side boosts take effect, for example, the result
US Answering question (1) involves working out case scenario of Trump-led growth, the Fed will be higher inflation and a more aggressive
whether Trump’s promises are real or the “art has a tough job ahead. The central bank is on Fed. Trump might be wary of that and enact
Capital markets expect US growth to be strong of the deal”. With the Republican party in charge an interest rate-cutting cycle, but given the US pro-growth policies first, but the haphazard
and outperform the rest of the world once again of both houses of congress, there is little to stop economy is nearly operating at full capacity, nature of some of his cabinet picks makes that
in 2025. We think this is a reasonable base case, Trump enacting his tax cut and tariff agenda. further cuts are hard to justify if growth is uncertain, as does his proclivity to ditch able
but the dispersion of risk cases is slightly wider We can be confident that tax cuts will come, and improving, tariffs push up prices and banking lieutenants in the face of negative news flow.
than current market pricing implies. fairly early on. Tariffs are more complicated. deregulation threatens financial stability.
We should expect a renewal of trade wars Success of the ‘three threes’ also requires a
The reasons to bet on ‘America first’ are summed
– particularly with China – but we know that As far as foreign governments are concerned, significant uptick in bank lending, hence why
up by the ‘three threes’ plan of Donald Trump’s
Trump likes to threaten extensive levies as a we suspect markets are underestimating how financial deregulation is on the docket. This also
treasury secretary nominee Scott Bessent: cut
way to force more favourable trade agreements much damage they could do to the US through requires the Fed to keep guiding real (inflation-
the budget deficit to 3% of GDP by 2028, boost
with other governments. tariff retaliations. China in particular maintained adjusted) interest rates to zero. The recent fall in
growth to 3% through tax cuts and deregulation,
restraint in Trump’s first term, but has less bond yields suggests that this may all come true,
and increase energy/electricity production to an We will watch US-EU negotiations closely next incentive to do so now. Beijing has many but the Fed is walking an economic and political
equivalent of three million barrels per day. No year, but investors should also keep an eye possible responses, from imposing its own tightrope. If its policies are seen as conflicting
one thinks achieving these simultaneously will on Canada or Mexico tariffs. The two nations tariffs to withholding rare earth minerals to the with Trump’s, it could set up a nasty battle over
be easy, but their aspiration alone is good news have become the US’ largest trading partners, nuclear option: weaponizing its massive stock of Fed independence, which markets will certainly
for company profits – while Trump’s tariffs are after trade barriers imposed by successive US bonds. not appreciate.
bad news for non-US companies. US administrations weakened links to China.
Trump’s recent threats to tax imports from North Despite these uncertainties, markets seem All things considered, US outperformance in
To Bessent’s three threes, we pose our own
American neighbours were something of a shock, confident about question (3). Investors see at least the early part of 2025 looks likely. The
three big questions:
as they eschew the previous “friendshoring” Trump’s domestic policies as improving US problem is that markets are already pricing in
1. What will Trump’s policies actually be? trend for pure economic nationalism. corporate profits, and his trade policies as a significant outperformance so, if any of the
hurting profits everywhere else – reinforcing factors above go wrong, US assets could see
2. How will other policymakers respond? US exceptionalism. But even in the best case some volatility.
3. What will the economic impacts of the overall scenario, the sequencing of Trump’s policies
policy mix be? matters greatly for growth.

Consensus forecasts for GDP growth (y/y %)

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EUROPE coalition they form could well be more stable
and therefore effective than the recently-
It is hard to get excited about European assets, collapsed SPD’s. Another French election next
but the conditions are there for a turnaround – or year is likely, and the outcome is uncertain, but
at least a stabilisation – in 2025. Whether those it is entirely possible that it returns a workable
conditions will be taken advantage of depends, and vaguely centrist government.
as so often with Europe, on the institutional
ability to do so. Economic headwinds are Perhaps more importantly, the Eurozone
undeniable, but we think markets might be economy is much larger than just Germany
underrating the potential upside. Political and France. The combined GDP of Greece,
turmoil looks bad now, but there is every chance Italy, Portugal and Spain is equal to Germany,
that things will look more stable in the second and southern Europe has fared much better
half of next year. And the relative cheapness in recent times than the traditional German
of European equities arguably undervalues the growth engine. They will be helped by the ECB’s
regional growth potential. accommodative stance, which may even help
address the regional inequalities that have long
The collapse of the French and German hindered European cooperation.
governments leaves a leadership vacuum amid
one of the most dire geopolitical situations in the There is also the potential for a manufacturing
EU’s history. Capital markets are understandably rebound if China successfully stimulates its
unnerved and pessimistic about the bloc’s consumer and business demand – but that has
near future. to be traded off against the impact of US tariffs.
Markets are pretty pessimistic about Europe.
The European Central Bank (ECB) has once again The potential upsides we mention should not
taken centre stage in a moment of economic make investors optimistic, just perhaps a little
crisis. It delivered another interest rate cut on more realistic.
12 December, and economists expect European
cuts to come faster than elsewhere next year.
CHINA
That has driven down European bond yields,
and made stock valuations more attractive After a long spell in the doldrums, there are
by comparison. finally reasons to be hopeful about China’s
prospects in 2025, in the form of genuine
The problem is that European companies
demand-focussed government stimulus. But
are not displaying enough profit growth to
there are also many doubts – both about how
lure investors in with those cheap valuations.
badly China might be hurt by US tariffs and about
Businesses and consumers are still bearing the
the government’s economic management.
weight of high energy costs, exacerbated by
All things considered, we expect the world’s
escalation of the Russia-Ukraine war. But there
second-largest economy to have a better 2025
are signs of improvement in the medium-term,
than its 2024. Chinese economic performance
such as energy companies expecting higher
does not directly translate to its equity market,
production next year.
though. Those assets could well see upside, but
Long-term improvements will be hard to remain fundamentally risky.
achieve while the war goes on. It is hard to
Chinese stocks had a mostly dour 2024,
interpret the various military developments,
punctuated by one incredible three-week rally.
but many feel that we are closer to some kind
Virtually all of China’s equity returns came
of ceasefire – probably with gains for Russia –
between late September and early October,
than to an open extension of the war into the
pushing them up to the point where only the US
future. Regardless of whether people like that
sports higher 2024 stock market returns. That
outcome, it would dial down a serious headwind
coincided with the communist party announcing
for Europe’s economy.
its intentions to support growth – following a
French and German political turmoil may not be warning that growth targets might be missed.
as big a barrier for European growth as many That Chinese stocks have not consistently
imagine. The CDU is likely to retake power in rallied since then is the result of Beijing’s actual
Germany’s upcoming election, and whatever policies underwhelming.

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China’s stimulus drive is not the ‘bazooka’ of for example, could be pushed closer to China if all, but the aspiration, combined with the UK’s EMERGING MARKETS
2009 or 2015, but it is significant. It has also Trump follows through on his proposed blanket political stability relative to Europe, has drawn in
been accompanied by an international charm tariffs. That may embolden Beijing to retaliate strong investment capital flows recently. If this During 2024, we decided for our regional
offensive: Beijing has declared a “fresh start” against Washington’s trade wars – unlike during continues into next year, Britain will benefit. portfolio allocation framework to separate
with Japan and a desire to improve relations Trump’s first term. Most of these involve mutual China from the other emerging markets (EMs).
with the UK, Australia and even India. These economic harm (as trade barriers usually do) The BoE seems more hawkish (preferring higher Of course, China’s impact on other EMs remains
decisions are all based on China’s long-term but Beijing may feel it has little option. rates) than other central banks, which could enormous. Commodity and energy producing
economic malaise, structurally weak domestic be a stumbling block. Markets expect sharply nations have suffered this year from weak
demand and a confidence sapping property steeper cuts from the ECB over the next year, Chinese demand and growth has been hard
UK
crash – but they are now made more pressing for example. This is puzzling, given that Britain to come by. Brazil is a case in point, ending
by Trump’s tariff threats. The UK could benefit from international and Europe face largely the same inflation the year with slowing growth but, surprisingly,
investment flows in 2025 – owing to its perceived pressures. This suggests either that the BoE will rising interest rates to counter inflation from its
The policy drive is already having some effect. political stability among international investors. prove more dovish than expected, or that UK weakening currency.
There has been a pickup in industrial activity The main downside, for the short-term, is the inflation is set to increase once more.
and producers seem to be working through Usually, strong US growth would mean a very
Bank of England’s (BoE) unwillingness to cut
the inventory overhang that came from years positive outlook for the group as a whole but
interest rates as aggressively as elsewhere. The JAPAN
of overproduction. It is hard to say whether Trump’s global trade policies are a problem.
policy backdrop is not as pro-growth as the US
this is genuine improvement or short-term We are positive about Japan’s long-term Indeed, even the “friend-shoring” theme which
or even China, but it is at least steady.
manoeuvring, though, as there has been a rush prospects but, like many regions, politics could benefitted Mexico and other Latin American
of exports to the US ahead of likely tariffs. That In the post-Brexit years, the UK has often been prove a stumbling block. The bullish case has countries earlier in the year has been hit hard
being said, non-US demand for Chinese goods cast as the indecisive cousin to Europe’s calm two key points: (1) ongoing improvements to by Trump’s threat to ignore his own trade
is improving, even from the struggling Europe. family. Those roles have reversed sharply since corporate structures that are delivering greater agreements and impose 25% tariffs on Mexico
the summer. The fledgling Labour government profitability, and (2) Japan’s cheapness, in terms (and Canada).
The key thing to watch in China next year will be has started Britain’s ‘reset’ with the EU; the of currency, labour costs and relative stock
consumer demand, which is showing marginal However, there are some positive stories. South
bigger question now is whether there will be an valuations. Both are long-term trends that bode
signs of improvement but little to get excited Africa has emerged from the elections in May
effective EU leadership to work with. well for Japanese assets.
about. Weak demand has held back the Chinese with an administration which could start to deal
economy for years, and it will need to improve In that respect, international investors currently Backing Japan paid off for periods of 2024 – with longstanding problems. The emergence
for China to cure its ills. That would be hard for score the UK highly in terms of sound policy. particularly earlier in the year – but returns of a centrist and hopefully better-focussed
Beijing to achieve even if it went full-throttle, Despite the fallout in the British media, the for international investors were undermined government has seen the Rand stabilise and
and the government’s track record does not fill autumn budget was not badly received, even by weakness of the yen. When the yen did inflation start to decline.
international investors with confidence. There is if certain measures temporarily pushed up significantly strengthen, Japan’s stock market
Dealing with internal problems seems to please
potential upside for Chinese assets, but they are government bond yields. The government sold off sharply and set off a wave of global
international investors and progress can be
inherently risky. suggested the autumn tax hike was a “one and volatility. This highlights that Japan’s structural
rewarded quite quickly. Thus the emerging
done” move, and calmer markets since then improvement is not a smooth journey – but
China’s biggest impact on international American Continent nations may find an
suggest that international investors believe profit growth is trending higher, which will
investments comes from trade flows, rather improving outlook after bearing the current
Downing Street. benefit stocks over the long-term.
than through its equity market. Beijing’s pain.
attempt to tighten economic ties with trading Going forward, we expect the government to be Japan’s improvement is a sign that late prime
Growing confidence in a Chinese recovery
partners sets up an interesting dynamic for focussed on improving the efficiency of public minister Shinzo Abe’s “three arrows” (monetary
should also help. Eastern Asian emerging
Trump’s second presidency. European leaders, spending. That will take a long time if it works at and fiscal stimuli, and structural reform) have
nations will probably benefit the most. While
landed at long last. Unfortunately, the current
energy producers may not find much support
government is unable to offer more support
for oil prices if the US does embark on a large
after losing its majority in a snap election. There
expansion of output, the metal producers
may be some more political change in 2025,
should have a healthier path. As we end the
but even so, this should not disturb the long-
year, copper is starting to move a bit stronger,
term case.
and that should be a positive signal for 2025.
The Bank of Japan (BoJ) effectively committed to
Lastly, India ends on the year with stories of
giving markets what they want after the summer
weakening growth, to just below 6%. That is still
sell-off. It will want a competitive yen to support
a level that most can only dream of. It ploughs
exporters, but not instability. The currency
its own domestic furrow and should continue to
seems to have stopped declining and, even if
do so through next year.
it appreciates from here, there is a mighty long
way to go before Japan stops being cheap.

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Asset classes
BONDS

Bond yields are highly reactive to central bank interest rate expectations. Just
like last December, capital markets are expecting lower rates next year across
developed markets, with Japan being the only exception. US rates – which have the
biggest impact on global markets – are expected to trough at the start of 2026, but
economists think there is a broad range of possible outcomes, due to early and
substantial policy changes. Interestingly, bond traders are predicting less dispersion
in where rates might be at the end of 2025 than economists. Long-term growth
expectations seem to have moved up recently, judging by the market’s implied
steeper path of rate rises past 2027.

Fed funds effective rate UK Base rate and futures

ECB Deposit rate and futures BoJ rates and futures

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Markets expect Eurozone rates to fall sharply judged as less risky than others too, thanks to This is a reasonable expectation, at least for the Another complicating factor, for the Mag7
next year from currently 3% to a low of 1.75%, relative political stability. That could make the early part of the year, but markets are arguably specifically, is that over half of its revenues
reflecting weak growth prospects on the UK one of the better bond markets in 2025. underappreciating some risks to the US outlook, come from outside the US. If the rest of the
continent. Whether that comes true depends and similarly underappreciating potential world continues to lag behind the US, that
on what happens to energy prices. Interestingly, At first glance, corporate bonds look expensive benefits elsewhere. will eventually prove a drag on profit growth.
UK rates are expected to be much higher than because of tight credit spreads (the difference This would be exacerbated by a strong dollar,
in Europe – a trough of 3.5% in 2026 – despite between corporate and government bond US investors seem to be particularly bullish as we expect to see in early 2025. The Mag7’s
broadly similar growth and inflation prospects. yields, which has tightened even further this going into the end of the year. As usual, this international revenues could also make it
Unless the UK gets some unexpected inflation, year). But that is mostly about the riskiness positivity is largely focussed on the technology vulnerable to Donald Trump’s trade wars. Tech
there should be scope for UK rates to fall more of government bonds mentioned above. titans in the ‘Magnificent Seven’ (Mag7 – Apple, services have historically been hard to put tariffs
sharply. Japan is the only major bank expected Interestingly, Europe’s economic woes have not Amazon, Alphabet, Meta, Microsoft, Nvidia, on, but if Trump is openly hostile to trading
to raise rates in 2025, but even there markets seen a significant widening of credit spreads – Tesla). Despite some disruptions this year, the partners in Europe and Asia, that could hasten
expect just the one hike. as you would normally see in a recession, due AI investment story still has momentum. This the development of a framework for taxing US
to bankruptcies. That could be a good sign for week, Google owner Alphabet saw its share tech champions’ overseas services.
Our measure of government bond risk (the European growth next year. price surge after it announced a breakthrough
difference between government yields and in developing a new quantum computing chip – Stocks outside the US are much cheaper, in
central bank guaranteed interbank lending US credit spreads are tight, and talk of recession investors shrugging off the tech giant’s antitrust terms of price-to-earnings ratios. That has been
rates) has risen almost everywhere this year that we heard over the summer has completely litigation. the case for a while, but fact of the matter is
– with Japan again the exception. That means died down. Corporate yields could go up if that they have not seen much upside due to
that, even though interest rates fell broadly in we see new issuance – as you might expect Despite the continued excitement, we wonder poor profit growth, particularly in Europe and
line with expectations this year, bond yields from Trump’s pro-growth policies. Mergers how long the AI investment theme can keep China. Chinese stocks keep bouncing around
have not come down as much. Recently, though, and acquisitions are often a driving force of going as a catalyst for valuation growth on the in response to whether or not markets like the
governments have started signalling slightly corporate bond issuance and, while these were promise of future productivity, rather than government’s latest stimulus announcement.
tighter fiscal policies, which has caused investors unexpectedly tame this year, there are signs delivering actual productivity. Companies like Despite that volatility, domestic economic
to buy longer maturity bonds. If governments that deals are being lined up for 2025. Nvidia keep posting stellar profits through momentum is building – but that has to be
keep signalling fiscal restraint, those bonds will selling AI-focussed microchips, but we have yet traded off against potential tariffs.
be supported. EQUITIES to see meaningful productivity enhancements
across the broad economy coming from these
UK bonds have stayed higher than other Conditions look supportive for global stocks in new technologies. No one doubts the potential
regions in 2024. That could be a sign of Britain’s 2025, but with significant regional dispersion. – just like no one doubted the transformative
particular inflation pressures, but it is hard to After years of central bank watching, it feels potential of the internet three decades ago.
justify inflation – and hence bond yields – being like economic growth expectations are now the But as the dotcom bubble showed, when
so much higher than in Europe next year. That main driving force behind equity markets. In the hype is so substantial, markets demand
should give the Bank of England more scope to that respect, investors clearly feel that the US tangible benefits fast. Could 2025 be the year AI
cut rates, and we suspect that UK bonds will be will continue to power ahead of other regions. technologies have to deliver?

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December 2024