The key year-end challenges for markets

In our latest monthly update video, our Chief Investment Officer Richard Flax reflects on what proved to be a challenging month for markets in November and discusses a range of scenarios – from the impact of Artificial Intelligence to the implications of the UK Budget. You can also find a written version of his commentary below.

After a couple of strong months in September and October, equities took a bit of a breather in November, closing the month slightly down. Global government bonds, in contrast, eked out a small gain, while gold rallied. 

Within equities, the UK and Europe were slightly positive – in sterling, while Emerging Markets and the US ended the month lower. 

Artificial Intelligence (AI) remained the focus for investors, amid ongoing concerns about a possible AI bubble. Nvidia reported strong results and gave a confident assessment on the outlook for its products, but that didn’t completely calm investors’ nerves. Measures of market risk, the so-called VIX volatility index, rose over the course of the month. We still see robust earnings within the tech space, but continue to watch for signs of over-exuberance. 

It was also worth noting that Emerging Market (EM) equities declined along with the Nasdaq – the major US technology-heavy stock index – in November. EM equities have performed well this year and we’ve maintained our exposure there. But we continue to debate how much diversification EM equities provide. Information technology comprises around 28% of the Emerging Market universe, slightly below the 32% of IT in the S&P 500. In Europe, in contrast, the weight of IT is below 8%. Emerging markets do provide geographic exposure, but they remain a key part of the global technology supply chain. 

In the US, the government re-opened following the longest shutdown in recent history and began to release some of the macro data that had been delayed. The overall picture remains opaque, with weaker than expected retail sales data and stronger than expected employment figures. That left investors unclear about the next move from the US central bank. But a number of central bankers came out arguing in favour of a rate cut at the next meeting in mid-December. The debate seems quite finely balanced but we think that the Federal Reserve (Fed) will cut rates once more this year. 

In the UK, all eyes were on the Budget in November. The weeks leading up to the announcement were a bit of a circus, with endless rumours and then an early leak of the report from the Office of Budgetary Responsibility. In the end, the Chancellor raised taxes, but perhaps by less than some had feared and increased spending by enough to placate her backbench MPs – for now. The market response proved to be quite muted, with bond yields falling a little. After months of speculation and a difficult fiscal position – a quiet market reaction goes down as a win for the government. 

Data of the month

The number that caught our attention last month was 26% – the difference in the share price performance between Alphabet (the parent company for Google) and Nvidia in November. Nvidia has been the poster-child for the AI revolution, but it’s not the only player. Other large tech companies continue to invest aggressively, as both customers and competitors. It’s a reminder that while the AI theme is likely to stay with us for some time, we shouldn’t expect to see a homogenous response from stocks – even in the same sector.

Question for the month

We’ve had a lot of questions on the UK budget recently. Was the UK budget “good”? Was it sensible?

We think there are a few points to make. First, the Chancellor has found herself in a difficult situation, with a high starting tax burden, weak growth and pressure from Labour MPs to increase spending. Second, the endless leaks and trial balloons gave the impression of a government adrift – which isn’t a great look, particularly in a post-Liz Truss world.

Third, in the end, the combination of increased taxes and higher spending was enough to placate both the bond market (also known as lenders) and Labour MPs. And for that alone, the Chancellor can feel relieved. But the long-term outlook looks more challenging. The Chancellor had already identified growth as critical to her economic plans – but there wasn’t much encouragement in this years budget. A high tax burden doesn’t usually encourage growth – and according to official estimates, we’re looking at the highest level of tax revenues (as a % of GDP) in more than 40 years. Let’s hope for a bit more focus on growth as we head into 2026.