The fourth quarter of 2024
The fourth quarter of 2024 saw some mixed performances from growth assets in their local currency, and some headwinds to defensive assets. However, overall, the year saw growth assets perform well, particularly the US and Japanese equity markets. With defensive assets, the speed of interest rate reductions was slower than markets had anticipated in the latter part of the year and against this backdrop, major global investment grade bonds struggled in Q4 and therefore made a negative return on the year.
Global and UK markets
Once again, global economic performance was led by the US this year, which separated from the other major areas as GDP growth averaged 2.6% quarter on quarter annualised over the first three quarters of 2024. The overall economic picture was also driven by the re-election of Donald Trump who re-enters the White House later this month.
In December the European Central Bank (ECB) cut its key interest rates for a fourth time this year, by 0.25%, but borrowing costs remain tight due to previous hikes still impacting existing loans. Looking ahead on interest rates, analysts see the prospect for larger rate cuts in Europe. However, the ECB does not face an easy task in the coming months given the headwinds in Europe. Â
In the UK, financial markets are currently pricing in a rate cut in February and the Bank of England Governor Andrew Bailey said rate cuts are likely to be gradual over the next year. However, some members of the MPC may be concerned about the effects of the Budget, as hiring in the UK has fallen to its lowest level in four years.
Growth Assets
Turning to growth assets, apart from Japan, major markets had a lacklustre finish to the year in December. An ongoing theme throughout 2024 was the continued dominance of the ‘Magnificent Seven’ technology stocks. However, since the start of 2024 we have been mindful about the ‘concentration risk’ among such names, expecting instead the earnings profile of other sectors to accelerate as those of the top seven companies start to decelerate.
Across Emerging Markets, some of the initial optimism that surrounded Chinese equities at the start of the quarter failed to materialise further, as the raft of monetary policy announcements were not followed up by any coordinated fiscal package. Â
The best performing factors over the quarter were Growth and Momentum. Given the strength of the US AI stocks over the year, they also provided the strongest annual returns. It was a more challenging year for Value, and this factor gave the lowest returns over the quarter and along with Small-Cap, over the year as a whole.
Defensive Assets
Defensive assets struggled over the quarter, in large part due to what the implications of a Donald Trump presidency might do for the direction of interest rates. The markets’ response over the quarter showed this to be the case, with the US 10-year Treasury yield moving sharply higher by the end of December.
Our themes for 2024
Looking at the themes for 2024, bonds did behave like bonds, but resilient growth and sticky inflation meant markets pared back expectations for how quickly rate cuts would be delivered, particularly in the US, impacting returns. We also saw the earnings growth of major US companies accelerate whilst the ‘Magnificent Seven’ decelerated, supporting the view we would see a broadening of returns. Finally, the view about keeping a balanced return was a valid one – it was pleasing to see global government bonds re-assert their downside protection benefits during the sell-off in early August, after a disproportionately weak US jobs report.
In Summary
In summary, with 2024 now behind us, we remain alert to opportunities and challenges in what is likely to be a geopolitically and economically volatile year ahead. Fundamentally, there is a plethora of political outcomes and policy decisions to analyse into 2025 and these are most likely to be the source of any macro shock which will create short-term noise in the new year.
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Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.
Past performance is no guarantee of future performance.
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