Outlook for the UK Remains Cloudy. Beyond Gold and USD, why not consider mining stocks?
- Claire Linh Nguyen
- Nov 25, 2024
- 6 min read
What do we need to know for the week ended on 22nd Nov 24
💡Highlights 💡
The Ukraine war escalated as the U.S. authorized Kyiv to launch long-range missile strikes on Russia, prompting Moscow to allow nuclear weapons in response to major attacks. Defense stocks rose on increased military demand, while gold and oil surged as safe-haven assets amid rising geopolitical tensions.
The UK’s annual inflation rate accelerated to 2.3% in October 2024, meanwhile, the Euro Area’s annual inflation rose to 2%, matching the European Central Bank’s target.
The annual inflation rate in Japan fell to 2.3% in October 2024 from 2.5% in the prior month, marking the lowest reading since January.
Gold surged to $2,680 per ounce, gaining nearly 5% this week, as investors sought a safe-haven asset amid escalating Russia-Ukraine tensions and global economic uncertainties.
US Market Insights
This week, further revelations about Donald Trump’s economic plans have fueled optimism for US equities, making them increasingly attractive to investors. Proposals to slash taxes and gut regulation are driving hopes of increased corporate profits and economic growth, even as escalating geopolitical tensions surrounding the Ukraine war cast a shadow over global stability. Meanwhile, Europe faces the dual challenges of potential new US tariffs targeting its largest industries and investment outflows exacerbated by the conflict.
At home, Trump’s policy proposals are sparking significant concerns about labour and supply chains. His plan to deport millions of undocumented workers has alarmed business leaders, who warn of severe labour shortages in key industries such as agriculture, restaurants, and small businesses. “People are worried about the price of food now? Just wait,” said one immigration lawyer, emphasizing the potential for rising costs as labour disruptions ripple through the economy which ultimately affects the US inflation.
On another note, a report from the Federal Reserve revealed that credit conditions tightened in 2024, with rejection rates for auto loans, mortgages, and refinancing applications hitting their highest levels in over a decade. Even as demand for credit remains steady, these barriers are adding financial strain to households.
In contrast, the housing market offered a rare glimmer of hope. Confidence among US homebuilders rose to a seven-month high in November, buoyed by stronger sales expectations. However, this bright spot may not be enough to offset the broader concerns stemming from labour shortages, geopolitical tensions, and consumer credit constraints.
Trump’s policies are reshaping the economic landscape at a time of heightened global uncertainty. While his plans are driving optimism in US equities, they are also sparking fears of domestic labor instability and exacerbating the economic challenges linked to the Ukraine war.
Recommendations:
Investors are maintaining a cautious but optimistic stance, balancing the potential for gains in the US stock market against broader risks stemming from geopolitical tensions and domestic economic challenges.
Last week, the Federal Reserve has signalled of easing back expectations for additional rate cuts in December, contributing to the strength of the US dollar, which saw notable gains this week.
Given these dynamics, investors are advised to consider taking long positions in US equities now, focusing on sectors like retail (boosted by holiday spending) and consumer staples (supported by steady demand) for potential short-term gains, with a strategic plan to sell by the end of December 2024. However, defense stocks, driven by heightened geopolitical tensions, may be worth holding for a longer-term investment strategy, given the sustained demand for military and security-related assets.
Following this, investors may consider buying USD now to capitalise on the currency's continued strength. This approach allows investors to benefit from both potential equity market growth and the dollar's safe-haven appeal amid ongoing global uncertainties. This dual strategy offers a tactical way to navigate the complex economic and geopolitical landscape heading into the new year.
UK Market Insights
The UK economy is grappling with a series of challenges as economic activity slows, borrowing surges, and inflationary pressures persist. With the private sector showing signs of contraction and businesses expressing cautious optimism for the months ahead, policymakers and investors are left to navigate an increasingly fragile landscape.
The S&P Global UK Composite PMI fell to 49.9 in November 2024, down from 51.8 in October, signaling the first contraction in private sector activity in a year. This drop was driven by weaker performance in manufacturing, and stagnation in the services sector. Businesses reported soft new orders and depleted backlogs as demand conditions remained muted. Inflationary pressures, including rising input costs fueled by higher salaries, technology expenses, food prices, and energy bills, continued to weigh heavily on companies, forcing many to plan conservatively and reduce staffing levels.
Service providers have attributed challenges to weak business confidence and client caution following the Autumn Budget, while firms across sectors expressed concern over the anticipated rise in payroll costs and barriers to investment and hiring.
Adding to the economic strain, public sector borrowing surged to £17.4 billion in October 2024, the second-highest October borrowing figure since records began in 1993. This increase reflects the growing cost of servicing existing debt amid higher interest rates, alongside increased government spending. The figure underscores the broader fiscal pressures facing the UK as policymakers balance public spending commitments with efforts to control the national debt.
The rise in borrowing coincides with falling household demand. As more consumers refinance mortgages at higher rates, disposable income is squeezed, prompting many households to save rather than spend. This shift toward caution has further dampened consumer-driven economic growth.
The labour market picture has become increasingly muddled. While job vacancies are falling and firms are reluctant to expand hiring, a survey has revealed that official statistics may be undercounting jobs by as much as 1 million. If accurate, this discrepancy would significantly alter the Bank of England’s (BoE) understanding of labour market tightness, which is a key factor in its interest rate decisions. The BoE has already signaled a dovish shift in recent communications, citing high underlying inflation pressures but acknowledging the need to avoid stifling economic growth further.
Recommendation:
Despite signals from Alan Taylor suggesting a potential rate cut, there is a strong likelihood that the BoE will maintain its current rate due to persistently elevated inflation. Seasonal factors, such as increased consumer spending during the festive season, could further drive up prices, adding to inflationary pressures.
However, holiday-related spending could temporarily boost consumer-facing stocks, particularly in sectors such as retail, travel, and hospitality, as festive demand drives revenue growth.
Additionally, with gold prices rising amid ongoing tensions in the Ukraine war, mining stocks could offer an attractive opportunity for UK equity investors. These stocks may benefit not only from increasing gold prices but also from heightened global interest in precious metals as safe-haven assets, making them a compelling option for diversifying portfolios during this period of geopolitical uncertainty.
Therefore, investors may consider focusing on consumer-facing sectors such as retail, travel, and hospitality, as well as mining stocks, which are benefiting from rising gold prices. Taking a long position in these sectors now could allow investors to capitalize on the seasonal boost in spending and the heightened demand for safe-haven assets amid geopolitical tensions. These strategic moves could position portfolios to gain from near-term growth and broader market trends.
EU Market Insights
Europe’s economic recovery remains fragile, weighed down by sluggish growth, geopolitical tensions, and a widening gap with the United States in innovation and market performance. Revised data from Germany, the region’s largest economy, highlight these challenges. Germany’s Q3 2024 GDP grew by just 0.1%, falling short of initial estimates and reflecting weak domestic and global demand. On an annual basis, the economy contracted by 0.3%, signaling persistent structural issues.
Germany’s mixed economic performance underscores the broader difficulties facing Europe. Household consumption in Germany showed some resilience, growing by 0.3% after a sharp decline in Q2. However, government spending slowed significantly to 0.4%, and fixed investments remained weak despite a softer contraction. The export-reliant economy was particularly hurt by falling global trade, with exports down 1.9%, exacerbating net trade’s drag on growth.
The rest of Europe mirrors this tepid recovery. Economic activity remains sluggish across the continent, with many countries grappling with similar issues: soft domestic demand, declining trade activity, and limited fiscal space to address these challenges.
Not to mention, the ongoing war in Ukraine has created unprecedented challenges for Europe. NATO’s largest European members may need to double defense spending to $720 billion annually, straining budgets already under pressure from slowing growth and rising debt costs. In Germany, political uncertainty ahead of the February federal election, brought forward after the ruling coalition collapsed, adds to the uncertainty.
The continent’s leaders face difficult choices, balancing the need to support Ukraine militarily and diplomatically while avoiding overextension of resources that could further destabilize their domestic economies. Germany’s cautious approach, including its refusal to provide long-range missiles to Ukraine, reflects this delicate balancing act.
Recommendations:
Investing in gold appears compelling in the current environment of geopolitical uncertainty, inflationary pressures, and slowing global growth. However, investors should weigh gold’s benefits against its risks and consider it as part of a diversified portfolio strategy. Those seeking a hedge against systemic risks and inflation may find gold an attractive opportunity, particularly if forecasts for higher prices in 2025 materialise.
On the other hand, with a high likelihood that the ECB will cut interest rates once more in December 2024, investors may consider taking a long position in European equity market now, aiming to capitalize on potential price gains by selling around the end of Dec 2024.
Source: CNBC, Bloomberg, FTnews and Reuters.
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