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?
Nvidia’s earnings results lift equities especially in the US Despite some apprehension from markets early last week (Nvidia stock price fell by 10% before results were announced), Nvidia’s quarterly earnings did beat expectations once again. Following the announcement, the stock price rebounded and ended the week 8% higher. Overall, the US S&P 500 stock market index closed at record high levels, as did the German DAX, while most equity indices in developed and emerging markets closed the week with positive returns. Only the UK FTSE 100 underperformed, dragged down by HSBC, which was hit by impairment costs linked to the lender’s stake in a Chinese bank.
The Eurozone stabilises but is not out of the woods just yet The composite purchasing managers’ index (PMI) for the Eurozone increased in February, indicating that the worst of the economic slump may be behind us. Manufacturing activity remained in contraction territory due to Germany’s weakness and the Ifo business climate brought little hope of an imminent rebound. However, services in the Eurozone bounced back to neutral territory with its highest reading in seven months. Putting it all together, we continue to see a zero-trend growth in the Eurozone, with mild recessions still ongoing or likely for several member states.
Markets now expect fewer interest rate cuts Minutes of the January meetings of the US Federal Reserve (Fed) and the European Central Bank (ECB) showed that central bankers are treading carefully around rate cuts. Cutting rates too early could lead to a stall or reversal in progress in restoring price stability. The market is now expecting three to four cuts instead of the seven it predicted in December. This aligns more with the three cuts pencilled in the Fed’s December projections and our long-held forecast of four. With the tech sector’s outperformance, resilient US and stabilising EU growth now driving equity markets, central banks’ pushback on rate cuts is having less impact. We think both equities and bonds currently reflect the central bank outlook
How we’re positioned in flagship portfolios
Back to balanced For about a year and a half, we’ve held fewer equities and more bonds in portfolios compared to our long-term strategy. In February, we brought both back to neutral. This means increasing equities and reducing bonds.
Increased equities to neutral; preference for small caps; cautious on Eurozone Given the reduced likelihood of a US recession, we closed our low-volatility US equity position and increased holdings in global small caps and the broader US market to neutral. However, as a recession is still the most likely scenario in the Eurozone, we still hold fewer Eurozone equities than normal; relative to our strategic allocation, we prefer European low-volatility /defensive sectors such as health care, consumer staples and utilities.
Added high-quality European corporate bonds We’ve increased our exposure to European investment grade credit as valuations are attractive. To fund this, we’ve reduced our exposure to US bonds and European/UK government bonds, which are less attractively valued. We’re maintaining a reduced exposure to riskier, high-yield credit markets.
For a detailed overview of our allocation in flagship portfolios, please visit our latest Counterpoint.
What we’re watching
Inflation in focus The Fed’s favourite measure of inflation, the price consumption expenditure (PCE) index, is out on Thursday. If the reading is higher than expected, especially in the core measure (which strips out food and energy prices) it could create market volatility. Conversely, a lower number than expected could lead to markets again predicting more and/or faster interest rate reductions. At the time of writing, the Reuters consensus poll expects a slight deceleration to 2.4% year-on-year in the headline PCE index (from 2.6% previously), and to 2.8% from 2.9% in the core PCE index. Inflation in the Eurozone (Friday) is set to fall further on the back of a weaker economic momentum in addition to the disruptions in the Red Sea easing.
