Reflecting on a year of elections, on the prospect of Trump returning to the White House in January and whether 2025 might bring some long overdue optimism for UK equities, Sheldon MacDonald CIO of Marlborough, tells us why he’s ditched his crystal ball and focusing stock selection instead on sound fundamentals – the capacity for growth, innovation, enticing valuations and good cashflow.
More than 50 countries have gone to the polls in 2024. Against this backdrop – and with various incumbents unceremoniously kicked out by voters – a raft of commentary has sought to reassure investors that election results rarely have a lasting impact on markets.
Some might now be questioning this purported wisdom. With Donald Trump sweeping back to power, there are suggestions in some circles that, frankly, anything could happen over the next four years.
Naturally, no-one has a crystal ball – or at least one that actually works. As the margin of Trump’s victory once again demonstrated, prediction can be a perilous business. Realistically, though, what might we expect?
One thing that has already become pretty clear is that US markets like the prospect of a Trump presidency. The S&P 500 recorded its best week of the year in the aftermath of his victory and has since gone on to successive highs[1], while the strength of the US dollar has further underlined positive sentiment.
Initially, with the notable exception of China, other major markets also responded enthusiastically. However, the UK’s FTSE 100 was among those that subsequently slipped back again[2] – although it has recovered somewhat since.
So what could all this mean for businesses and economic growth in the UK, where the narrative around equities has been seeking a boost from a “good news” story for several years? Does Trump’s return present yet another challenge or might there just be grounds for optimism?
Twitter, tariffs and trade
The gloomier assessments of the way ahead revolve around the uncertainties a second Trump presidency could entail. The Commander in Chief’s proven capriciousness is front and centre in this regard.
Trump pitched plenty of curveballs – to use the American vernacular – during his first term. Many of his policy decisions first emerged on his Twitter feed, which served as a go-to platform for abrupt mood shifts and the gratuitous use of capital letters.
It’s possible such “loose cannon” tendencies may be tempered this time around. With the Republicans claiming control of both the Senate and the House of Representatives, the president won’t need to fight tooth and nail to push through his agenda.
Yet it’s his agenda, of course, that has many people worried. The long-term outlook is likely to hinge on issues such as defence spending, deregulation, the environment, cryptocurrency and – maybe above all – tariffs.
Trump’s campaign rhetoric routinely featured the threat of a blanket tariff of 10% to 20% on all goods from US trading partners. Even stiffer penalties for China, Mexico and Canada have since been promised[3]. The reality might not be quite so brutal, but the fact remains that the US is the UK’s biggest export market.
As a result, there’s now talk of the “special relationship” between the US and the UK somehow leading to a one-off trade deal or another would-be solution-cum-compromise. Researchers have already warned of billions of pounds in lost exports, while forecasters have downgraded projected UK growth for 2025[4].
Focus on fundamentals
So why is our view of the UK equity market essentially unchanged? Why do we still believe this corner of the investment universe remains home to a range of attractive long-term opportunities?
The explanation has very little – if anything – to do with politics. It’s instead firmly rooted in the same investment case that has underpinned the UK’s most promising businesses throughout the myriad challenges of the past few years.
In our opinion, the companies we invest in have solid fundamentals and a strong capacity for growth. Many are highly innovative and require funding to realise their potential to help bring about positive, far-reaching disruption.
Crucially, most are under-researched and therefore undervalued. This is especially true of those at the lower end of the market-capitalisation spectrum, where the majority of investment analysts seldom tread.
The best of these businesses have shown resilience in the face of the pandemic, soaring inflation, rising costs and, most recently, the frenzied speculation surrounding the autumn Budget. This is because they’re able to benefit from sensible management, sound operating models and healthy cashflows – attributes that are unlikely to be fatally undermined by a second Trump presidency or any other political shockwave.
It’s worth repeating that no-one has a crystal ball. Nobody can ever be entirely sure what the future holds. But today, after a year dominated by elections, the brightest UK companies still get our vote.
Sheldon MacDonald is CIO of Marlborough.
[1] See, for example, CNN Business: “Want to know what Trump will do as president? Look to the market”, November 12 2024 – https://edition.cnn.com/2024/11/12/business/stock-market-trump-win/index.html.
[2] See, for example, Reuters: “FTSE 100 pulls back from early gains after Trump’s victory”, November 6 2024 – https://www.reuters.com/world/uk/ftse-indexes-jump-trump-elected-us-president-2024-11-06/.
[3] See, for example, Sky News: “Trump threatens sweeping new tariffs on Mexico, Canada and China on first day in office”, November 26 2024 – https://news.sky.com/story/donald-trump-threatens-sweeping-new-tariffs-on-mexico-canada-and-china-on-first-day-in-office-13260800.
[4] See, for example, The Week: “The potential impact of Trump tariffs for the UK”, November 12 2024 – https://theweek.com/politics/the-potential-impact-of-trump-tariffs-for-the-uk.
