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In December the Trump trade that had greeted the re-election of the US president showed signs of fading; investors becoming concerned that his intended policies will lead to a widening budget deficit, higher inflation and increasing global trade tensions. As a result, there was little sign of a “santa rally” in December, but it is perhaps not surprising that investors were taking profits after a strong year for equity markets driven by AI inspired US tech stocks.

The year ended with the focus returning to a “higher for longer” interest rate environment. Although the Federal Reserve cut interest rates by 0.25% (to 4.25-4.5% range) in their December meeting, Jerome Powell said that in order to see further rate cuts they will need to see evidence of lower inflation. His repeated warnings of a need for caution spooked investors with markets now pricing in just two 0.25% US interest rate cuts for 2025.

UK inflation remains stubborn, and the latest CPI showed UK prices rising by 2.6% in the year to November, the highest for eight months. This led the Bank of England to hold interest rates at 4.75%. The Governor Andrew Bailey was also cautious over the year ahead stating the Bank “can’t commit to when or by how much we will cut rates in the coming year”. Markets are currently pricing in two 0.25% UK rate cuts for 2025.  At the same time the Bank of England downgraded their (lack of) growth forecast to zero for the final quarter of 2024, increasing risk of a stagflationary environment in 2025.

In Europe although inflation increased to 2.2% it was lower than expected and allowed the European Central Bank to cut rates by 0.25% to 3% to help boost the flagging eurozone economy. Markets believe we will see a differential between US and European monetary policy and expect a further 1% of rate cuts by the ECB in 2025. This could boost European equities, that are definitely a contrarian play going into the new year given the gloomy economic backdrop on the Continent.

Like Europe, China remains much unloved due to the economic headwinds, but in December President Xi Jinping pledged that China would meet its 5% GDP target and continue to be an engine of global economic expansion. During the month policy makers changed their stance on monetary policy from “prudent” to “moderately loose” for the first time in fourteen years which helped improve investor belief that 2025 could see a recovery in the World’s second largest economy.

In 2024 stockmarkets certainly followed the old adage to “climb a wall of worry” with huge political and geopolitical uncertainty. It has provided a perfect reminder to focus on corporate fundamentals and valuations and ignore the noise that can prove distracting to a long-term investment strategy!

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Market Watch

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Whilst December proved fairly subdued with the MSCI World index falling back by 1.9%, this did little to take the shine off what has been a remarkable year for stockmarkets with the global benchmark up by 21% in 2024. The dominance of the US in global equity benchmarks was highlighted by the S&P 500 returning 24% in 2024. This is despite the index slipping 2.4% in December with profit taking understandable. The influence of technology stocks is illustrated by the massive 30.7% annual gain in the Nasdaq driven by mega caps riding the wave of AI.

The US has once again been the darling of developed markets over the past year, although Japan gave it a run for its money with an annual return of 21% with corporate restructuring boosting returns and M&A activity becoming a feature. This was highlighted in December with talks of a merger between Honda, Nissan and Mitsubishi illustrating the changing corporate culture. Japan was the pick of markets in December with the Topix up 4.6% with sentiment boosted by improving economic data and hopes of fiscal stimulus.

UK and European markets lagged but benchmarks still produced annual gains of around 10%. In December the FTSE All Share index fell back 1.1% but the Eurostoxx finished marginally positive despite the economic gloom.

China and Hong Kong were probably the surprise of 2024 with the Hang Seng index up 3.3% in December bringing its annual gain to 23% as investors bet on further economic stimulus in 2025 (and that Trump’s bark is worse than his bite regarding tariffs).

Turning to bond markets and Federal Reserve policy was the main driver in December, with US bond prices falling and yields rising sharply during the month. The 10-year treasury yield reached its highest level for seven months and finished December at 4.57% up from 4.17% at the beginning of the month and 3.88% at the beginning of 2024 (which did not turn out to be the ‘year of the bond’). Gilt yields also rose in December and finished at 4.56% up from 4.24% at the beginning of the month and 3.53% a year ago. As mentioned earlier rate cuts have been pushed out as the inflation genie hasn’t got back into the bottle properly.

In commodity markets oil had a fairly strong end to the year with the price of a barrel of brent up almost $3 in December to finish the year at $74.64. it was a fairly stable year given geopolitical tensions with a barrel costing $77 a year ago Turning to gold now and although the price went sideways in December it’s been a great year for the shiny stuff up 27.5% in 2024. An ounce of gold now costs $2641 compared to $2071 at the start of 2024.

Turning to the currency markets and in December the US dollar continued to strengthen up 1.7% versus the pound whilst the Euro fell 0.4% The pound lost ground slightly against the dollar in 2024 but gaining 4.6% versus the Euro and up almost 9% against the Yen which has continued to weaken. Not wishing to legitimise crypto by adding the performance to this paragraph, but in Euros bitcoin gained 148% in 2024 – truly astonishing.

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Fund Watch

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Going over to the fund world now and the China sector topped the IA sector tables in December, up 3.1% whilst Healthcare and Index linked gilts propped up the performance tables both losing over 5%. Over the year Financials & Financial Innovation was arguably the surprise winner. Then again banks have been throwing off cash like it’s going out of fashion using it to fund dividends and buybacks.  Financials just edged out Tech and the main US sector with a return of 24%. At the other end of the table and the was one clear loser last year, Latin America with the sector losing 25%.

In the eclectic world of investment trusts there are many alternative sectors not found in the open-ended world. Environmental and Hedge fund sectors led the way in December and over the year Leasing sector topped the tables returning 33% The only sector to feature in both open and closed end top five tables last year was North America – returning 22% in both. It’s been a record year for takeovers. There have been 14 mergers, and the number of trusts has fallen from 327 at the turn of the year to stand at 299 now. With fund raising tough to come by when many trusts sit on double digit discounts, that number will surely continue to shrink.

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Manager watch

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2024 has provided a good backdrop for equity fund managers to make money for clients, but a trickier environment to beat benchmarks as mega caps, driven by US tech stocks have been at the forefront of the stockmarket rally.  According to the FT there has been $450 billions of outflows from actively managed funds as investors have shown favour for lower cost index tracking funds. Shares of many asset managers that rely on fund manager led strategies have struggled and fund managers will be under pressure in 2025 to outperform. However, with increasing concentration of US and global benchmarks to a small number of tech giants trading on heightened valuations, now may not be the time to be solely focused on index trackers!

There is no shortage of content from managers giving their predictions for the new year (worth taking with a large pinch of salt), but there is some consensus that going into 2025 that it will be harder for the tech giants to meet lofty expectations for the returns generated by AI. There is also a widely held concern as to whether Trump targeting low taxes and deregulation will succeed given inflation and size of the US deficit. Whilst expectations for US soft landing is priced in by most fund managers the expectations for UK and Europe are very low and these markets could prove a good hunting ground for value investing stock-pickers.  China continues to divide opinion amongst managers but with valuations attractive this market could also provide good opportunities for contrarian fund managers.

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This document is produced by Fairview Investing Ltd, an independent research consultancy. The content is for information purposes only and does not constitute financial advice. The commentary or research provided do not constitute a personal recommendation to deal. Any statements, opinions, forecasts, and figures are made by Fairview Investing (unless otherwise stated). They are considered to be reliable at the time of writing but may be subject to change.

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Fairview are independent investment consultants sitting on the Investment Committee of EXE Capital Management.