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?
US markets shrug off inflation figures There were no big surprises from last week’s US inflation reading (the personal consumption expenditures index), which rose 0.3% from December to January or 2.4% year-on-year. This has left markets largely unperturbed as strong earnings and economic growth continue to drive sentiment upward. The S&P 500 and Nasdaq equity indices closed at record highs again, while US Treasury yields remained flat.
Germany outperforms despite headwinds In Europe, the German DAX equity index closed at record high levels following upbeat earnings. This came despite the ongoing, mild recession in Germany and Eurozone inflation slowing less than expected in February. In emerging markets, equities fell last week despite stronger commodity prices, soaring semiconductors exports from South Korea and stronger-than-expected growth in India. Again, the culprit was China, which saw a contraction in manufacturing activity for the fifth straight month in February.
Not cutting yet in the Eurozone Inflation has continued to fall in the Eurozone, but the core reading (excluding food and energy) remained just above 3% last week. This supports the case for the European Central Bank to hold interest rates in their meeting on Thursday for a bit longer before starting to cut towards mid-year.
Looking for hints of the first cut in the US This week is a busy one in the US with the release of the ISM Services survey (Tuesday), various labour reports (Wednesday), and finally the release of non-farm payrolls and the unemployment rate (Friday). After two consecutive blockbuster employment growth releases in December and January, consensus expects job creation in the US to slow down but stay at robust levels. This will likely bolster the case for a mid-year rate cut by the US Federal Reserve, in line with our forecast.
A hard budget choice The Chancellor of the Exchequer will unveil the UK’s budget on Wednesday – hoping to avoid a mini-budget crisis like his predecessor. Public spending has been highly constrained by inflation, slowing growth and prior budget restraints, while the tax burden (relative to economic growth) is at levels not seen since World War II.
Our latest portfolio positioning
Staying 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, given better US economic prospects and interest rate cuts from mid-year, we brought both back to neutral. This means increasing equities and reducing bonds.
For a detailed overview of our allocation in flagship portfolios, please visit our latest Counterpoint.
