An update from Waverton Investment Management 

Outlook: Optimism Amid Challenges 

At Waverton, we have allowed equities to run higher after a strong start to the year, as confidence improves alongside market breadth. However, within fixed income, we continue to like Government bonds over credit as we see significant value on offer whilst also providing diversification in case of an economic slowdown surprise. Alternative strategies are also well–positioned to provide uncorrelated returns if market conditions become more volatile. When considering left–tail risks, an unlikely topic of discussion by the Committee was the 3% probability of an asteroid impact on Earth in 2032. While 3% is concerningly high, it was agreed that the risk is unlikely to affect investment markets in the Committee’s 12-18 month tactical time horizon. 

US exceptionalism remains entrenched… 

The US economy remains firmly supported by strong consumer demand, particularly within the services sector, and signs of resilience are evident across several key indicators. Consumer spending continues to hold steady, with higher–frequency data suggesting a stable demand profile. While some areas, such as staples, are showing signs of increased price sensitivity, the broader economy remains robust. Retail sales have slowed slightly, and the Services PMI has underperformed expectations, but this moderation is seen as a natural part of the economic cycle rather than a cause for concern. The US labour market remains a key factor, with stability here helping to support consumer confidence. The potential for upward pressure on wages remains as policies around immigration evolve, but overall, employment conditions appear solid. 

The US is seeing encouraging signs of recovery in the manufacturing sector, with the PMI moving into expansionary territory. Data on money supply and the new orders to inventory ratio suggest that this momentum will likely continue. While policy and trade uncertainties have led to some caution, several industries such as freight are emerging from prolonged downturns, which signals a positive turning point. Growth plans are ramping up across various sectors, further underpinning optimism for the US economy, particularly for the latter half of 2025. 

The outlook for the US remains generally positive despite uncertainties surrounding Trump’s second term as president. While rhetoric during the campaign was more aggressive, the policies enacted so far have been relatively moderate, especially concerning tariffs. Waverton expects continued growth–supportive fiscal policies, such as tax cuts and light–touch regulation, which should provide a positive economic backdrop throughout 2025. Although there are risks from the potential impacts of rising tariffs and tighter immigration policies, the overall economic framework remains conducive to growth. 

A mixed picture in Europe and the UK… 

In contrast, the European and UK economies have been less dynamic, with minimal growth since the summer. High energy prices, geopolitical tensions related to China and the Russia–Ukraine conflict, and domestic political challenges have weighed on their outlook. However, there are a couple of reasons to be optimistic. The UK, for example, has recently seen an improvement in Citi’s economic surprise index, suggesting that conditions may be better than expected. While headline inflation will likely rise over the year, as easy comparables from last year roll off, we believe the Bank of England will have the foresight to look 

through this, continue to lower interest rates, coupled with the potential for infrastructure investment, energy transition projects, and supply-side reforms in both the UK and Europe could provide a significant boost to growth. There’s also the possibility that the resolution of the Russia-Ukraine conflict could ease energy prices, creating further room for economic recovery. 

In the UK, while there are concerns around the government’s economic strategy, particularly in light of high energy prices and an increasingly unproductive state, there remains a belief in the economy’s potential to surprise to the upside. Within fixed income, Waverton continues to prefer Gilts and US treasuries while monitoring the Sterling-Euro exchange rate as a key indicator of sentiment towards UK sovereign risk. 

Not out of the inflation woods yet….. 

Inflation trends in major economies, including the UK, Europe, Japan, and the US, suggest a disinflationary trajectory, though risks remain. In the UK, inflation has surprised to the upside recently, but we anticipate this will moderate, particularly in consumer cyclical sectors. In the US, while inflation has stalled, persistent pressure in services and housing remains, but overall conditions point to a gradual normalisation in the year ahead. 

The US dollar’s uptrend may be abating, which could support global growth and boost US corporate earnings. A looser monetary policy combined with tighter fiscal policy would help ease some of the pressure on the US dollar, particularly if companied by a Trump-led Mar–a–Lago accord. Gold continues to look attractive, though it is currently overbought, making a more cautious short-term approach advisable. Still, it remains a solid long-term investment in any portfolio. 

Equities remain the most attractive asset class for now… 

Equity markets have shown broad-based strength, with diversification across sectors and regions driving positive returns. Although manufacturing recovery is partially priced in, valuations on a global scale remain reasonable, and we are comfortable with the increase in equities driven by market movements. 

While still early in the year, we have seen a broadening of equity market leadership, which should favour the gradual shift in our equity positioning (with broader industry group exposure) over the last 3-4 years and active management approach. This has the potential to be sustained, given a normalisation in earnings growth of the Mag7 versus the rest of the market, as some industries are still exiting their own cycles. Potential catalysts could come from more of the $2 trillion US fiscal stimulus being deployed as Trump focuses on “America First” and the continued onshoring of manufacturing, greater fiscal support from China, and a stabilisation of the European political environment. 

For now, we remain modestly overweight equities, reflecting an improving macro backdrop and numerous bottom up investment opportunities. We are marginally underweight fixed income and alternatives, but we remain cautiously positioned within these asset classes as a hedge against our more bullish outlook for the global economy and equities. 

Risk Warning 

The views and opinions expressed are the views of Waverton Investment Management Limited and are subject to change based on market and other conditions. 

The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. 

All material(s) have been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy of, nor liability for, decisions based on such information. 

Date 25.02.2025