Christmas and the markets
The markets would love to see peace break out in the Middler East and Ukraine in time for Christmas. They would rejoice if governments that are overborrowing and overspending could sort out their finances for the new year. They hope the digital wave rushes onwards with plenty of growth in profit and turnover for the giant US and Chinese companies leading the revolution. Professional investors would like to go home for festive food, wine and family enjoyment knowing their portfolios will benefit from a tide of good news into 2026.
The truth is the New Year will inherit the problems of the old. It will soon lose its innocence facing the daily realities of political tensions and economic stresses. Should we worry too much over our Christmas puddings and mince pies? We need to look at what the movers and shakers of the global news agenda and the controllers of the economic levers want for Christmas.
President Trump desperately wants peace in both Ukraine and Gaza. He is trying to get Ukraine to accept a poor deal as he cannot get a better one out of Russia. It is more likely 2026 will see prolonged fighting as the two combatants dislike their current territorial positions. Meanwhile, Trump has helped broker a ceasefire of sorts in the Middle East and now wants his leading Arab allies to take it to the next stage. This too will be difficult as Hamas wants a continuing role and Israel wants them marginalised. Markets may have to settle for stalemate in Ukraine and a volatile ceasefire in Gaza.
The President also wants the US economy to pick up pace. He will allow a bigger deficit than markets would like and will be urging the present and future Chairman of the Fed to ease money and credit. The US will run with slightly higher inflation in order to be the fastest growing of the advanced economies. The President regards every new investment coming into the US as a personal triumph. He wants peace so he can broker trade and investment deals with more countries, whatever their governing structures.
President Xi needs some faster economic recovery at home and has the means to get the Chinese Central Bank and government spending programmes aimed at encouraging the Chinese consumer. On the world stage President Xi wants a longer period of stability with China being able to export more, import more technology, gain a bigger grip over key minerals and industries and build an ever-expanding military. He may well achieve much of this as the West scrambles to re position its response to Chinese industrial and military strength.
As the leaders of the EU survey their new year, they worry about the withdrawal of US military and financial support for the war in Ukraine and notice the way the European economies have fallen badly behind the US this century. They ponder the hard-hitting Draghi Report pointing out how much slower their growth has been and how the EU has been missing out. They have watched as consumers and businesses go digital and buy American. They are unlikely to do enough to make much impact on the growing gap and are held back, in the case of France, by high borrowings and a political system that cannot deliver a budget. On the plus side their inflation is under control, short-term interest rates can stay down, and Germany will spend more on re-armament giving defence led businesses a continuing boost.
The UK government is reeling from two unpopular tax raising budgets that have slowed the economy and drained support from the governing party. Amidst talk of leadership change there is surprising political instability in a country with a recently elected government with a large majority. The government will need to revisit the lack of growth and see how it can make policy changes to improve that. It also needs to do more to contain the surge in borrowings, made worse by slower growth.
So, can we be of good cheer as investors this Christmas? Why not? Most people think the world will grow a bit more next year, that the digital revolution will race on, and there should be more opportunities to make a decent return in global equities. It may not match 2025, but the big worries are so far contained. We will keep you engaged next year as markets again wrestle with the concerns over debts, valuations and political disruptions.
About the author
The Rt. Hon Sir John Redwood has been a long-standing member of the EPIC Investment Partners Advisory Board.
John is a well known commentator on governments and economies, with long experience of investment markets. Trained as an analyst at Robert Flemings, he moved to N.M. Rothschilds where he became a Manager and Director of pension and charitable funds and Head of Equity Research. He was seconded to become Head of the Downing Street Policy unit before chairing a large, quoted UK industrial business. He served as an MP and a government Minister.
In 2007 he set up Pan Asset with a colleague, an investment management business that pioneered active/passive funds and models in the UK. Following the sale of the business to Charles Stanley, a quoted investment manager in the City, he became their Global Chief Strategist advising on non-UK markets and economies. He also ran a demonstration fund for the FT, writing articles about it and illustrating the use that can be made of ETFs in portfolios.
He is now an adviser to EPIC, providing insights into the big investment issues of the day from the debt and spending problems of the major governments to the green and digital revolutions which have so much impact on equity markets. He is a Distinguished Fellow of All Souls College, Oxford, where he helps with their Endowment investments and gives occasional lectures on modern economics and politics.