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?
A batch of strong US economic data sent markets lower last week. Equities and bonds fell as markets anticipated the negative impact on economic activity of further interest rate increases.
Despite the weakness in markets, this did not lead to a strong change in interest rate expectations in the US. It seems that markets are still not convinced the US Federal Reserve (Fed) will increase interest rates again following a likely 25 bps increase in July.
Central banks have kept up the narrative for interest rates to be higher for longer. In the US, the yield of the 2-year US Treasury briefly surpassed 5%, marking a new high for the year. In the UK, government bond yields rose to their highest levels since mid-2008, with the UK 10-year gilt yield reaching 4.65%.
In equity markets, most regional indices fell last week. The US, although negative overall, was propped up by positive performance in the utilities and consumer discretionary sectors. Japanese equities also dropped this week as investors locked in profits from strong year-to-date performance. Unlike the US, all Eurozone sectors ended the week in the red.
This week, apart from the start of the earnings season, with some of the large US banks reporting this Friday, the key US inflation report is due. We expect both headline and core inflation (which excludes volatile components such as energy and food) to continue to come down. Investors will also turn to China to see whether the disappointing economic rebound post-reopening will continue, as credit and trade data are ahead of next week’s report on economic growth for the second quarter.
PORTFOLIOS AT A GLANCE
Despite the negative market performance this week, our flagship portfolios have continued to deliver positive returns year-to-date. During a challenging market backdrop this year as central banks fight to balance inflation versus recession risks (and a mini banking crisis), portfolios have proved to be resilient.
Markets can be volatile. There is elevated macro uncertainty, tighter financial conditions, and the potential for asset prices to move downward. This is why we are maintaining a more cautious near-term approach relative to the wider market.
We’re holding more defensive positions such as low volatility equities in the US and Europe, and US dividend equities. We’re also keeping a lower overall equity exposure and instead holding more high-quality fixed income, such as developed market government bonds.
This approach should help act as a buffer if markets sell off.
Past performance is not a reliable indicator of future returns
