Tariff impact could unsettle emerging markets
Bola Onifade, portfolio manager at Nutmeg, thinks that the prospect of higher tariffs by the US and retaliatory counter-tariffs by China is likely to unsettle emerging markets overall, as they get caught in the crossfire of potentially lower trade volumes and weaker sentiment. “Emerging market central banks may be hindered by slowing US interest rate cuts. This is because slower rate cuts in the US may result in US dollar strength, which is typically problematic for emerging market economies,” Onifade said.

However, Onifade believes that it would be a mistake to treat all emerging markets in the same way. “Several dynamics are at play in each country, which means investors should consider markets on their own merits,” Onifade said. “While the Chinese economy is also embattled by deflation and ailing real estate markets, the Chinese government has already demonstrated that it can implement substantial, supportive policy changes quickly,” Onifade added. “Taiwanese equities, lifted by its leaders in chip-making, can be expected to benefit from the continuing boom in demand for chips. India’s expanding middle class has resulted in a rapid increase in domestic investment in financial markets. Brazil, with its economy much reliant on commodities trade, may yet see another difficult year in the face of trade headwinds."

UK better positioned than Europe
Looking ahead to 2025, Scott Gardner, investment strategist at Nutmeg, thinks that the UK appears to be in a relatively better position than Europe, thanks to consumption and trade.

In the UK, household incomes relative to inflation continue to grow, which he expects will support increased consumption growth throughout the year. The UK housing market is expected to recover due to lower interest rates, which should boost spending in areas such as retail sales and durable goods.

“The UK also benefits from its strong position as a leading global exporter of services, while Europe is known for its high-end goods. This key difference means the anticipated tariffs on goods entering the US poses a significant challenge to Europe's fragile economic recovery, particularly for Germany,” Gardner said. “Germany faces additional hurdles as it recovers from supply and demand disruptions while looking ahead to a snap general election in February 2025 after the collapse of the governing coalition.”

Valuations present opportunities and risks in 2025
Pacome Breton, head of portfolio management at Nutmeg, meanwhile highlighted how multi-asset portfolios, such as Nutmeg's, have benefited from above-historical average performance. Nevertheless, Breton is alert to some heightened risk of volatility. Valuations are still on par with historical averages in many regions. “The UK and China are relatively cheap, but US equity valuations are quite materially above the long-term average. As confidence in US equity outperformance increases, a minimal degree of disappointment in the economy or earnings could create volatility,” Breton said.

“Next year promises to be eventful on the geopolitical stage. The ongoing war in Europe and instability in the Middle East are unlikely to recede easily. A new administration in the United States, with concentrated power, introduces a degree of uncertainty compared to the more predictable Biden administration,” Breton continued. “The policies from the Trump administration could reignite short-term inflation, bringing a temporary halt to the Federal Reserve’s rate reduction cycle.”

While these risks should not distract investors from the long-term opportunities available across markets, Breton is reflecting this in his portfolio with a higher level of cash exposure. While he thinks markets remain attractive, this “dry powder” enables him to be on the front foot to take advantage of opportunities if the market becomes more volatile. For example, he is tilting his UK exposure towards the FTSE 250, which could benefit next year from tailwinds in the UK economy, while continuing to remain overweight on US equities following recent positive performance.

Wrapping up, McManus emphasised how in these moments of impressive market growth, experienced investors will know the importance of not falling into the trap of blind optimism. While many of the building blocks that made markets optimistic this year are still firm, he does not rule out current market challenges. “Large valuations cannot be ignored, the geopolitical environment remains uncertain globally, and the return of US President Donald Trump to the White House could elevate instability. For now, the imperfect global balancing act remains intact and is driving markets forward,” McManus said.