Reflections of the CIO… December 2024

Headlines for the final few months of 2024 were mostly dominated by politics and politicians across the world, diverting investor attention away from less entertaining and harder to read economic trends. In the end, however, the importance of the real economy in driving market performance reasserted its influence in December, leaving investors with much to think about as the New Year begins.

December began with a continuation of November’s trend of US assets with US equities particularly enjoying the re-election of Donald Trump, anticipating the benefits of tax cuts and ‘de-regulation,’ and shrugging off the implications of aggressive trade and foreign policies. There were signs of over exuberance, with cryptocurrencies shooting up at the same time as retail demand for leverage to ‘play the market,’ but for much of November and into December there was little to stand in the way of ‘America First’ in investment performance.

Gravity ultimately reasserted itself in mid-December when the Federal Reserve made clear that the battle to bring inflation under control was not yet over, and would likely prove harder to do given the ongoing strength in the domestic US economy. Their forecasts for the future guided to fewer interest rate cuts than many had expected and provided the excuse for the post Trump election rally to unwind. Bond yields rose and equities fell, with the last few weeks of the year proving particularly weak and managing almost to bring market indices back down to where they roughly were at the beginning of the quarter, and negative for the month overall.

The year as a whole, though, was a good one for market and portfolio returns. The optimism surrounding falling inflation and interest rates, together with the emergence of a strong technology theme (artificial intelligence), was enough in the end to see off the risks surrounding stretched government balance sheets and a messy, confusing political environment. Investor short termism was also a key feature of the year, with few willing to look much beyond a few months into the future, given that the level of interest rates in a highly leveraged financial system was inextricably linked to fickle, short term data releases.

These themes are still very much present and leave us with an interesting situation as we think about positioning for the year ahead. On the one hand, there is now much greater clarity on the key issues that will matter to markets, for example inflation trends and US trade policy, but these issues also remain frustratingly difficult to forecast with any degree of certainty. We don’t know if the initial ‘maximalist’ positions of President Elect Trump will morph into something less disruptive to the global economy, nor are we any clearer on working out if the next few inflation prints will continue to fall, or tick up again, potentially igniting a renewed bout of jitters in global bond markets. Investors and markets, after a good 2024, are in a ‘wait and see’ mode currently, until the intentions of the new US administration become clearer and enough inflation data is released to allow conviction to build on underlying trends. Whilst in this ‘wait and see ‘ mode there is also a notable – and perhaps slightly worrying – degree of consensus about how the key issues will eventually play out. Opinion is heavily leaning on US outperformance continuing at the expense of rest of world assets – be that in currencies or equities – with few willing to take the plunge and bet against the relative momentum of America First.

We don’t particularly disagree with this notion, as the momentum behind US assets is built on many good foundations. Similarly, the lack of momentum in other assets around the globe is also anchored in weaker fundamental trends. China, for example, is still dealing with the consequences of a property market slump, something which has continued to undermine investor confidence locally and in the region as a whole.

It is also true that much of this news is known and at least partially reflected in relative valuations of US versus rest of world assets. However, for this picture to change meaningfully, markets will need policy actions and empirical evidence that the relative drivers are shifting, and that process, inevitably, will take time to develop. Consequently, we wouldn’t be surprised if the is marked by a lot of noise and not a lot of progress before the picture becomes clearer. Given that bond yields are reasonably high in absolute terms and equity dividend yields are underpinned by solid profits, investors are at least being paid reasonably to wait and, for the active manager, trading opportunities will inevitably present themselves.

We are also keenly aware of how quickly sentiment and events can shift in a highly leveraged financial system. Squaring this circle, to our minds, will require your investment team to push again on broadening out diversification in your portfolios, as far as each mandate will allow. This approach has proved over and over to be by far the most effective way of generating returns whilst simultaneously being able to ride out the inevitable bumps without too much drama. There are multiple investments that don’t always depend on markets going up, and many which enjoy volatility, features which we think will be valuable over the course of this year.

Overall, we expect the investment environment to remain a positive one as the effect of a growing global economy combines with, ultimately, acceptable outcomes in the inflation and political arenas to drive returns upwards. As the headline quote to this report implies, there hasn’t really been a change in our opinions or in market drivers, even though a new calendar year has begun. This is because the process of deciding an outlook and positioning portfolios accordingly is a continual one, reflecting the fascinating and ever changing world we live in. We look forward to updating you as our thinking and real world events develop.