Monthly update: trump’s return fuels growth expectations

1. WHAT’S HAPPENING IN FINANCIAL MARKETS?

Donald Trump has cemented his second term as US President, a result that boosted expectations for domestic growth in America. Following the election, the US dollar reported its largest gains in eight years and US government bond yields rose (prices fell), before easing towards the end of the month.

However, while Trump’s expected tax cuts should support economic growth, it could also result in inflation accelerating again, especially if proposed tariffs on foreign goods get implemented.

In recent months, cooling inflation and a stable jobs market suggested the roadmap for reducing interest rates in 2025 was relatively straightforward for the US Federal Reserve.

But if inflation starts rising again, it could result in policymakers being more cautious on the timing of interest rate cuts next year, although the amount by which they drop is not expected to alter.

Fahad Kamal, Chief Investment Officer at Coutts, says: “The election has clearly influenced growth expectations for the US, reinforcing the view that it will likely continue outpacing its developed peers.”

We could see deeper rate cuts in Europe

Meanwhile, Europe is braced for easing growth and inflation dropping to below central banks’ 2% target, which could cause the European Central Bank to respond with deeper cuts.

Since the pandemic, the eurozone economy has struggled to regain momentum, with a loss of competitiveness weighing on businesses.

A major factor in this is the ongoing impact of Russia’s war in Ukraine. High energy costs continue to impact industries, especially in Germany, where the manufacturing sector has been hit the hardest.

2. WHAT DOES THIS MEAN FOR YOUR INVESTMENTS?

At Coutts, we continue to favour stocks over bonds in light of the ongoing positive economic conditions. We adopt a global approach within our equity holdings, with a focus on US companies which continue to perform strongly - supported by growing earnings.

We have, however, adjusted our strategy to reflect the UK’s improving economic backdrop. Our position in UK equities has shifted from underweight, relative to our benchmark, to neutral.

To fund this move, we reduced our allocation to European equities, moving that position from overweight to neutral. But overall, we remain overweight in global equities.

While we prefer stocks, we maintain well-diversified portfolios to manage potential market volatility. For example, we invest in US government bonds, which could help steady returns if stock prices fall.

We also hold a fund with 'liquid alternatives' to provide diversification in case both stocks and bonds decline – a scenario we don’t anticipate now but consider possible over time.

The value of investments, and the income from them, can go down as well as up, and you may not receive the amount of your original investment. Past performance should not be taken as a guide to future performance. You should continue to hold cash for your short-term needs.

3. THIS MONTH’S SPOTLIGHT: Why has bitcoin surged in value?

Bitcoin has gained significant momentum following Donald Trump’s re-election, reaching new highs in the wake of his promises to protect the currency. His commitment to end the Biden administration's regulatory crackdown on cryptocurrency and position the US as the “crypto capital of the planet” has boosted confidence, pushing bitcoin to surpass the $100,000 mark in December.

Bitcoin is the oldest and largest cryptocurrency, though others like ethereum, tether and dogecoin have also become popular. Some investors view cryptocurrencies as a digital alternative to traditional money, but their prices are highly volatile and depend on broader market trends.

After reaching its November high, the value of bitcoin fell by more than 6% in the space of a week. These fluctuations are driven less by fundamentals than by market liquidity, tech stocks and broader sentiment.

As a result, bitcoin’s true value remains difficult to assess, as it arguably has no intrinsic value.

Fahad said: “At Coutts, we take a cautious approach to cryptocurrencies. Despite their growing appeal, we do not currently view them as a viable investment option given their volatility and speculative tendencies.

“We prefer to focus on more stable, proven investment strategies for our clients that are better suited to preserving and growing wealth over time.”

If you are a Coutts client and would like to discuss any of this in more detail, please contact your private banker.

Our views in more detail:

US election result: What it means for investments

Autumn Budget: What could it mean for your finances?

Lower interest rates – A financial planning guide