Written by Chris Ayton
In a shortened week due to the New Year holidays, most global equity markets were down but, when translated into Sterling returns, were positive due to the Pound being very weak against most major currencies, particularly the US Dollar. The MSCI All Country World Index was down -0.3% in local currencies but ended the week up +0.9% in GBP terms. In fixed income markets, the Bloomberg Global Aggregate Index was up +0.1% in GBP hedged terms.
The Dollar-Sterling exchange rate had hit a level as high as $1.34 as recently as September but has subsequently fallen to around $1.25, as UK manufacturing and growth data has generally been lacklustre. At the same time, resilient economic growth and the prospect of higher inflation in the US has led US Federal Reserve officials to suggest that US interest rates may have to stay higher for longer. Higher interest rates in the US boosts demand for US Dollars, hence providing support for their currency.
Perhaps counterintuitively, a weak Pound can be good news for many UK companies as the FTSE 100 has a plethora of large, globally focused companies in the energy, pharmaceuticals, mining and industrials sectors that earn the majority of their revenues outside the UK, often in US Dollars. A weak Pound makes those overseas revenues more valuable. Partially as a result of this, the FTSE 100 Index led the way over the week, rising +0.9% compared to the more domestically oriented FTSE UK Small Cap Index that was only up +0.2%. Stocks like BP and Shell, that earn the majority of their revenues in US Dollars, were particularly strong.
The S&P 500 Index in the US started the week pretty poorly but recovered some ground on Friday, boosted by a rebound in a number of tech-related names. The US equity index ended the week up 1%, although all this return came from US Dollar strength as it was down -0.5% in local terms. Having rallied sharply since the US election, Tesla reported that their annual deliveries declined for the first time in over a decade, coming under pressure from cheaper Chinese competition. That said, Tesla still retains its position as the world’s largest electronic vehicle maker.
China’s stock market struggled over the week, with the MSCI China Index falling -2.3% in local currency and -1.2% in GBP terms. Weak economic data out of China and continued fears over what “China-bashing” policies Trump 2.0 will bring, continue to provide unwelcome uncertainty to both domestic and international investors. Chinese export growth has been quite strong over 2024 but the prospect of the imposition of widespread and sizeable tariffs on exports to the US are driving fears that this will threaten this important source of growth in China going forward.
As we enter the new year, which will no doubt bring a range of uncertainties and challenges, we continue to have strong confidence that the best course of action for generating sustainable long-term, risk-adjusted investment returns involves a global diverse portfolio comprised of multiple complementary investment styles, as well as exposure to multiple different global markets and currencies.
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All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 6th January 2025.
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