Monday Club – 17/02/25: Your weekly Wealthwise digest

Investment round-up

* Confidence returned to the fund sector in the final quarter of 2024, with net fund sales up 20 percentage points on the previous quarter. BlackRock and Legal & General Investment Management led the table of net gains, while Artemis and Orbis also did well. Read more from Trustnet here

* Legal & General has launched three new index funds – the MSCI ACWI IMI Equity, Global Bond Multiverse and Future World Infrastructure funds. The funds are designed to offer broader diversification, in response to growing investor concerns about market concentration.

* Jupiter has teamed up with HanefETF to launch the group’s first ever active ETF. Jupiter Global Government Bond Active UCITS ETF will aim to provide a diversified portfolio of developed and emerging market government debt.

In focus: Us or US?

The Calastone fund-flow data for January presented a familiar picture. Money piled into North American equities, with inflows of £576m as the stockmarket recovered from a tough December. At the same time, UK-focused funds shed £1.07bn – the sixth-worst month on record, despite record UK share prices. Yet should investors be rethinking this choice in future months?

The overriding market narrative has been that the US is growing faster and its technology sector is far more plugged into the exciting AI trend. Certainly, there is a gulf between the two economies. US growth came in at 2.8% for 2024, compared with just 0.9% for the UK. This week, the ONS reported UK GDP rose by 0.1% in the fourth quarter of 2024, year on year, while the US economy grew by 2.3% over the same period.

Yet the two economies are actually heading in different directions. The UK economy outpaced expectations, coming in 0.2% ahead of economists’ consensus forecasts. Rather than flirting with recession, the UK is now flirting with growth. In contrast. the US’s number was notably slower than the 3.1% growth in the third quarter, and below the 2.6% that originally forecast.

While no-one is suggesting the UK may be returning to meaningful growth, there are some aspects that suggest greater resilience within the economy. The UK consumer, for example, is in strong financial health. Barring the pandemic, the UK household savings ratio is now at its highest level since 2015 at 10.1% .

Compare this with the US, where the saving rate is just 3.8%. It dipped below this level in the immediate aftermath of the pandemic but, that aside, it has not been this low since just before the Financial Crisis in 2007. The consumer boom that is fuelling the US economy looks increasingly fragile, with US credit card balances now sitting at $17.7tn ($14.05tn). Retail sales showed some early signs of weakness in the latest figures.

In the UK, the wealth factor comes from house prices, which hit new highs in January, according to Halifax. In the US, a significant proportion comes from the stockmarket – around 30%. In other words, the consumer boom is dependent on the US stockmarket remaining buoyant.

For a long time, this has not been an issue. The dominant technology companies have continued to lead markets higher – thus boosting household savings – but that trade has looked more vulnerable in recent weeks. As we discussed in this space two weeks ago, the arrival of Chinese challenger DeepSeek has destabilised the US mega-cap technology companies. Yes, there has been some recovery in the very short term, but the S&P 500 is up 3.96% since the start of the year, compared with 6.02% for the FTSE All Share index, and 10.89% for the Euro Stoxx index.

There is also the question of inflation – addressed in more detail below. Both countries have high government debt and are particularly vulnerable to any spike in bond yields. Nevertheless, the UK would appears to be better-placed than the US to cut rates in the coming months.

In the UK, the latest CPI data shows prices rose 2.5% in the 12 months to December. This was a slightly smaller increase than in November, but still above the Bank of England’s target. Rising energy costs are still a problem although the pressures in the US appear greater – the latest CPI data showed inflation running at 3%, its fastest pace since August 2023. Trump’s policies on tariffs, deregulation and immigration may also prove inflationary.

Peter Graf, chief investment officer at Nikko Asset Management Americas offered this uncomfortable verdict: “Stubborn inflation is likely to reinforce the disappointing sentiment released on Friday. Combined with earlier service activity weakness, these data also support a more pessimistic reading of the ambiguous January employment report. Animal spirits may take a hit as investors realise that, despite the flurry of activity, President Trump’s policies may not be a silver bullet to keep the economy on a steady climb.”

For her part, Monica Defend, head of Amundi Investment Institute and chief strategist at Amundi, said: “We also expect higher yields, which will impact the real economy, including consumption, housing and investment. While some pressures on investment may be mitigated by deregulation in the banking and energy sectors, as well as increased investment in AI, there remains uncertainty regarding Trump’s position on the Inflation Reduction Act. Overall, the net effect of this entire package is likely to be negative for growth.”

For the UK, the range of data emerging this week – from CPI to jobs figures – should offer a clearer picture on the next move for rates. Until recently, Catherine Mann had been considered one of the most hawkish members of the Bank of England’s Monetary Policy Committee – however, in a speech at Leeds Beckett University, she said a weakening jobs market and slowing consumer demand would dampen business pricing and reduce inflationary pressures. She was one of two members voting for a 50bps rate reduction in the February meeting.

With the economic factors finely balanced, the stockmarkets are worlds apart. The US market has a number of problems: investors in any global fund are likely to have a huge allocation already, it is very concentrated in a handful of technology names that look increasingly vulnerable, and it is very expensive.

The UK has the opposite problem. It is suffering from a lack of attention, rather than too much. This means prices remain very low. Simon Murphy, manager on the VT Tyndall Unconstrained UK Income fund, was clear that, at a time when markets are volatile, it is better to be cheap and below-the-radar, than expensive and high profile.

“This is the best opportunity set I have seen in my career,” he continued. “The UK is deeply unloved and there are some wonderful valuations for some very good businesses.” Sentiment was still on its knees – particularly for smaller and mid cap-companies – Murphy added, and “it would not take a significant shift in confidence to change the dynamic in UK stockmarkets”.

A range of other factors are at play here, with the tariff element still difficult to call. How much will it cost the UK economy? Will Trump be able to impose tariffs without raising prices for US consumers, and therefore denting the engine of growth in the economy? Can the UK economy build self-sustaining momentum? Such variables are yet to be determined – but the US looks more risky than investors are assuming, while the UK may be less risky than the prevailing gloom suggests.

Read more on this from Calastone here, from the Telegraph here and from the Bank of England here