There has been so much change in the world this year with elections, inflation and interest rates. So what has the effect of this been on the major economies around the world and how are their markets performing as a result?

US

The US economy has been the biggest player in the world, mainly due to it being the leader in technology innovation. The so called ‘magnificent 7’ have dominated headlines all over the world due to their record growth and share price out-performance. These 7 companies are: Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla. These assets have undoubtedly provided investors with very high returns. However, many economists do believe that this record growth just simply cannot keep growing at the same levels it has been because it appears mathematically impossible. Therefore, growth must slow down soon for these stocks, making them less reliable than people may realise.

Having said that, other US stocks have also performed well but have been somewhat overlooked due to the massive out-performance of the magnificent 7. The US as a whole is highly diversified with strong sectors like technology, finance, healthcare and consumer goods which helps to mitigate the impact of downturns in a single sector. It also has such strong global influence with trade relationships and leadership in international organisations.

The current political environment has been turbulent with the upcoming election and Biden standing down, but on the whole hasn’t massively affected the markets. We would think a Republican leadership would likely be slightly more beneficial for markets as they are more focused on tax cuts and growing businesses. However, we don’t believe the outcome of the election will have a huge effect on markets.

Overall, the US market is highly diversified and innovative, with strengths in technology, finance, and services. It faces challenges such as income inequality, healthcare costs, and infrastructure needs but offers significant opportunities for growth through innovation, sustainability, and global trade partnerships.

UK

The UK has a diverse economy, specialising in financial services, real estate and manufacturing, but has been pretty unloved for the past few years with record number of investment outflows. This is partially due to US being so successful and investors moving their money to the US, but there have also been other factors that contributed to the lack of confidence in the UK economy.

One of the main factors has been the uncertainty around Brexit which has caused concern for investors regarding trade agreements with other countries and regulatory changes, which has made the UK seem less attractive compared to other more stable markets.

Another factor is the UK’s economic performance has been lacklustre compared to other major economies. The UK has had slow growth rates, stagnant wage growth and high inflation and interest rates which all combined has made the UK market seem less appealing to investors. Investors typically seek stable, predictable, and growing markets, and the UK has faced challenges in meeting these criteria in recent years. The new Labour government has stated that increasing economic growth is going to be a main target.

Recently, confidence in the UK seems to be returning slowly as international asset managers like Blackrock and Allianz have started to increase their exposure in the UK, particularly mid-cap stocks. UK assets appear cheap compared to other markets and its now expected that the UK will have a more stable government which has helped confidence.

Overall, the UK’s economy is robust and diversified, with significant strengths in services, finance, and technology. It faces challenges from Brexit and demographic changes but has good opportunities for growth.

Europe

Europe has also been fairly unloved, for similar reasons to the UK. Mainly, economic growth has been slow compared to US and Asia, alongside slow productivity growth, an aging population and high levels of debt in some countries. In the past, Europe has underperformed the US, mainly due to less innovation, fewer tech and reliance on traditional industries like banking and industrials.

Europe has a mix of developed economies like Germany and France, which are highly industrialised, and emerging economies like Poland, Hungary and Czech Republic that are currently having high levels of growth. There are also countries like Spain, Italy and Greece that have experienced challenges, but are recovering.

Germany is the 4^th largest economy in the world and is known for manufacturing and being the lead exporter in Europe. Europe as a whole specialises in manufacturing, industrials, financial services and agriculture. It invests heavily in its research and development, particularly in Germany, France and the UK. The EU has significant trade relationships with the US, China, and other global markets, exporting machinery, vehicles, pharmaceuticals, and luxury goods. The UK’s departure from the EU has had economic implications, leading to new trade and regulatory arrangements.

Europe always has a harder task when it comes to setting interest rates as it is practically impossible to set an interest rate that suits all of the countries in the Eurozone – Germany would ideally need a different interest rate to Greece, for example, due to their completely different economies. The European Central Bank has actually been the first central bank to cut interest rates recently, whereas in the past the Federal Reserve in the US usually hikes or cuts first and the other central banks follow. This could suggest that there will be the start of the recovery phase and confidence may start to return to Europe. Like the UK, European stocks also appear cheap compared to other markets, so with an increase in confidence, we should start to see more flows back into Europe

Overall, Europe’s economy is robust and multifaceted, with a strong foundation in manufacturing, services, and innovation. It faces challenges but also presents opportunities for sustainable growth, technological advancement, and deeper integration.

Asia

Asia has been known for its rapid economic development and large markets. There are some countries that we would now consider developed like Japan, Hong Kong and Singapore due to them being highly industrialised, having robust infrastructure and high standards of living. Then there are also developing economies like Indonesia, Vietnam and Philippines that are experiencing rapid growth in manufacturing, services and agricultural sectors.

Currently, India is the main growth driver in Asia, known for its large services sector, specialising in IT and software.

China is the second largest economy in the world following US, known for large-scale manufacturing and a growing services sector. However, it is now facing a slowdown in growth due to Covid and trade tensions with the US. Also, supply chain diversification is becoming more desired – rather than relying so heavily on China, companies are diversifying their supply chains to include countries like Japan and Vietnam.

Japan is the third largest economy in the world and is known for advanced technology and automotive industry. It does however face challenges with an aging population and deflationary pressures, however Japan now has inflation at 2.8% and the hope is that the era of deflation is behind them.

Asia as a whole does face some political and economic challenges surrounding North Korea, the South China Sea disputes and issues between the India and China border, all of which impacts economic stability. Asia has also started to become more focused on sustainability due to high levels of pollution and environmental degradation.

Overall, Asia’s economy has a mix of high-growth emerging markets and developed economies driving global economic trends. The region’s economic future looks promising, with substantial potential for growth and development.

We currently invest in all of these markets within our portfolios. We have a higher weighting in US and Asia, and a focus on small and mid-cap assets. We think each market has its own strengths and weaknesses but all have significant potential for returns from investment.