Investment Market Commentary – Q4 2024

Overview

The final quarter of the year continued the previous economic trends. Europe and Asia have had limited growth, although moving into 2025 Europe has been more positive, whilst the US has continued to demonstrate exceptional performance. The UK has settled into a more stable political regime, whilst on the other hand there is more uncertainty around Donald Trump’s election in the US and its impact on markets. Overall, global returns throughout 2024 were mixed, with a number of developed markets producing positive returns led primarily by the US.

Central banks had a tricky year to negotiate, with many wanting to cut the high interest rates we saw at the start of 2024 whilst having a delicate ‘balancing act’ of cutting rates without triggering inflation. The path for interest rates is still broadly seen as a downward one, however, as the year has progressed it has become clearer that the speed at which rates are cut may be slower than anticipated 12 months ago. Despite this slower pace of rate cuts, the downward trend is widely seen as an important factor moving into 2025 which will put pressure on returns from deposit based accounts.

Overall, investors seemed broadly more positive heading into 2025, and this has been seen in the early months of the year with most of the major markets having delivered positive returns year-to-date.

Equities

2024 was a dynamic and eventful year for equity markets with broad measures of global stock performance showing a 10% gain in the first half of the year fuelled by improved economic data and lower inflation. However, this performance was not uniform across all sectors and regions.

Equity markets remained positive over the final quarter of 2024 and have continued this way leading into 2025. This is despite investor uncertainty increasing due to the slowing of US interest rate cuts, strong economic data persisting despite higher interest rates and Donald Trump’s policies, which would appear to be inflationary. Like many developed economies over the last quarter, most returns have come from large cap stocks. Whilst investors have grown more positive through the year, the influx in investment to large cap shows a level of caution as investors see protection in these companies.

There has been a large valuation gap between large and small cap stocks for some time now. Although there have been times recently where mid and small cap stocks have outperformed, these have tended to be short lived. Investors will be looking for this gap to close, particularly if interest rates continue to fall. This path is not certain though and valuations have been more complex with the rise in passive investing.

In the UK, a strong first half of 2024 diminished in the second half, primarily by concerns in business over tax rises in the October budget. Despite these concerns, the UK still appears to be undervalued, particularly compared to the US, and therefore some fund managers see greater opportunities here.

The US surprised analysts through 2024, as many expected a recession due to high interest rates. In reality, the US shrugged off these doubts and consumer spending remained surprisingly strong leading to corporate earnings outperforming expectations. A key, well documented, theme of US markets outperforming has been technology stocks, particularly those linked to AI such as Nvidia, Alphabet and Apple. Looking ahead, the US may have some challenges in 2025, and this has been seen in the early months with challenges to US AI dominance. Returns have continued to ‘broaden’ across the cap spectrum as valuations continue to appear stretched.

Geopolitical influences continue to be a major factor in European markets, in particular trade tensions with China impacting the Eurozone’s largest economy, Germany. However, there are positives such as unemployment rates across Europe hitting historic lows and household disposable income growing. The European Central Bank also continued to lower interest rates with a total of four cuts through 2024, showing that they are willing to press ahead with cuts to encourage investment.

Asian markets performed better in the second half of 2024 as China issued a series of stimulus measures for its economy. Whilst China remains the dominant economy in Asia, India is seen as more of a driving force as its economy is growing faster and continues to have an expanding workforce. China has delivered positive returns in the last quarter of 2024 and into the first months of 2025. There are several positive signs such as increases in manufacturing and bond issuance. However, there remains uncertainty over Donald Trump’s policies, particularly in relation to tariffs on Chinese exports. Despite this uncertainty, it is important to recognise that around two thirds of Chinese exports to the UK already face tariffs and this has been accelerating a diversion of trade to other regions such as Europe in recent years.

Following sharp declines through 2021 and 2022, earnings growth expectations in Emerging Markets have moved higher compared to Developed Markets over 2024 and 2025 to date. An acceleration in earnings along with rate cuts could provide a tailwind to the Emerging Market sector.

Finally, Japan has seen higher volatility in recent months as its markets have been impacted by higher currency fluctuations and worries over US growth. This has settled somewhat, however Japanese sensitivity to domestic and global sentiment changes remains strong, Japan’s economic growth has been switching in recent times from the traditional export industries in the Japanese economy to a domestic market focus. A rapid rise in wages had finally given Japanese households the purchasing power they have needed to spend more.

Bonds

Throughout 2024 there was surprising movement in bond yields, with bonds showing a similar volatility to equities. This was driven by changing sentiment around rate cuts, with expectations of recession in early 2024 followed by stubborn inflation and fewer than expected rate cuts as the year progressed. The US Federal Reserve has indicated a slower pace of rate cuts through 2025, which sent the 10 year US Treasury yield back up to 4.5% at Christmas, before falling again slightly in the first months of 2025.

Corporate credit has been more resilient with companies taking advantage of investor interest to accelerate borrowing plans. The outlook for corporate borrowing looks steady for 2025 as many companies will be looking to refinance debt arrangements secured during the pandemic.

Summary

Throughout the last year the path to global growth and market returns has not always been clear. Initially, lingering concerns around inflation hampered returns but as these dissipated, central banks began to loosen monetary policy which in turn proved to be a catalyst for markets. In developed markets returns primarily came from a relatively small number of large cap stocks whereas in emerging markets we have seen small and mid-cap stocks provide better returns.

The global economy has been robust but dominated by the strength of the US, which has led to a wider debate about American exceptionalism in an era when many economies have suffered from factors such as a downturn in the Chinese economy and political instability. Ongoing wars in the Ukraine and Middle East as well as major elections in many leading economies have provided uncertainty. Despite these challenges, global markets have performed reasonably well with Europe perhaps lagging behind other major markets in 2024.

Market outlook

Looking ahead, there is a sense of optimism from a range of investment managers. There is still belief that the momentum of earnings growth can be carried into 2025 which may help to justify some of the high valuations currently seen with US technology stocks. Time will tell on the impact of Donald Trump, however many analysts will broadly see his administration as pro-business.

We believe that our proposed changes will continue to assist with the future growth potential of our portfolios, whilst maintaining the level of volatility experienced within a range that is deemed suitable for each Investor. We can also confirm that the fund charges being incurred within the Defensive, Cautious and Balanced portfolios will be increased slightly, whilst the level of charges incurred within the Moderately Adventurous and Adventurous portfolios will be reduced slightly.

The following documents provide more detail around the recent performance, updated new fund selections recommended for each of our Model Portfolios: