As we turn the page on 2024, one thing is clear: the world we invest in continues to evolve. The past year defied expectations, surprising us with economic resilience even as markets braced for turbulence. So, what did we learn, and how can we better prepare for what 2025 might bring?
Mixed performance across equity regions: US equities rose back to their historical highs last week, driven mainly by AI optimism as chipmakers from the US to Taiwan posted strong gains. Chinese stocks continued to fall as China grappled with deflation and supply chain disruptions. UK stocks struggled too, given markets delayed expectations of the first cut to interest rates.
A fall in bond prices as last mile to inflation normalisation gets challenging: Global government bond prices fell last week as yields rebounded following rises in inflation in the US, Eurozone and UK. Given that the Eurozone is likely in a mild recession, there is a limit to the upside in Euro bond yields. Nevertheless, they still slightly outperformed US Treasuries.
A moderation in rate cut expectations Given some stronger expected data –inflation, retail sales, and jobless claims – policymakers pushed back against the prospect of early interest rate cuts. As such, the size of rate reductions expected by markets is falling and the timing is less certain. The market now expects the US Federal Reserve (Fed) to reduce interest rates by a total of 140 basis points (bps, a hundredth of a percent) over the course of 2024, down from 175 bps. In other words, with the Fed rate currently at 5.25-5.5%, market expectations are for that to fall to 3.85%-4.10% by the end of 2024.
We think markets are still ambitious in their rate expectations: As mentioned above, markets have already tempered their expectations of cuts this year, and we believe we will likely see more adjustments in the short term. We forecast a cumulated 100 bps of cuts by year-end, starting around mid-year (unlike the current market expectation of March). Why? In the US, we haven’t yet seen a broad-based weakening of the economy (there are pockets of weakness and strength). In the Eurozone, the European Central Bank (ECB) seems wary of easing too early, to avoid risks of spurring a rebound in inflation despite a sluggish economy.
Oil disruptions likely to be short-lived: The geopolitical tensions in the Red Sea have caught headlines and disrupted shipping routes, impacting commodities. Oil prices rose to 80 US dollars per barrel, and the World Container Index has doubled since the end of the year. However, we think the impact on the oil market will likely be short-lived – as was the case at the onset of the tensions in the Middle East. The rise in shipping rates could also stabilise as new routes have now been established.
How we’re positioned in flagship portfolios
Maintain defensive equity positioning: As described in our 2024 Investment Outlook, we made some changes to portfolios in early December. These included a slight increase to our equity allocation in European and developed Pacific equities (excluding Japan).
Fewer risky and more safer bonds: We also reduced our exposure to higher-risk credit while increasing our US Treasury holdings, given the attractive and lower-risk yields the latter provide.
Commodities as a portfolio diversifier: Finally, we diversified our commodity exposure into a broader allocation.
For full details of our flagship portfolio positioning, please visit our website.
What we’re watching
Eurozone economic activity is out on Wednesday: Economic activity in the Eurozone may have stabilised in January, but markets expect the Purchasing Managers’ Index to remain in contraction territory.
The ECB meets on Thursday: We believe the ECB will hold interest rates at their meeting this week (keeping the main refinancing rate at 4.5%) and continue to push back on market expectations of an early rate cut.
Earnings season continues: On the other side of the Atlantic, Tesla and Netflix (amongst some other 70 companies) will report their Q4 earnings this week. Although Tesla and Netflix are parts of the so-called “Magnificent 7”, both tend to have a lesser impact on the market than others such as Microsoft, Apple or Nvidia.
Past performance is not a reliable indicator of future returns.
