Portfolio Manager Commentary 2024/12

2024 Market Recap and 2025 Outlook

2024 was another positive year for risk assets. Strong U.S. economic growth supported developed market equities, which posted total returns of 19.2%. Emerging markets, helped by a late-year rally in China and solid results from India and Taiwan, delivered 8.1%. U.S. mega-cap tech stocks continued to dominate, driving global growth equities higher for a second consecutive year. Meanwhile, expectations of deregulation following the U.S. election boosted financials, lifting global value stocks by 12.3%. Commodities saw moderate returns of 5.4% due to weak Chinese demand, while concerns about U.S. fiscal policy drove gold up by 27.1%. Developed market central banks began policy normalization in 2024, but persistent inflation and solid growth led investors to reduce expectations for quick rate cuts, especially in the U.S. As a result, rising yields and a stronger dollar caused global investment-grade bonds to record a -1.7% return.

Regional Performance Trends

The U.S. economy outperformed other regions in 2024. Despite some mid-year concerns, economic growth remained strong, with GDP growing at an average annualized rate of 2.6% over the first three quarters. The S&P 500 was the top-performing equity market, returning 25.0%. While AI-driven stocks led gains, broader earnings growth also contributed, setting a positive tone for 2025. Europe, on the other hand, faced headwinds. High energy costs, tough regulations, and weak export demand weighed on the manufacturing sector. Political uncertainty in France and Germany added to the region’s struggles. As a result, European equities underperformed, returning 8.1%. UK equities delivered a slightly better return of 9.5%, driven by a recovery from the previous year’s lows and initial optimism following the election. However, higher-than-expected tax increases in the autumn budget, particularly in national insurance, dampened sentiment and impacted hiring, creating challenges for the Bank of England.

Fixed Income Overview

Fixed income markets saw high-yield bonds leading the way for the fourth consecutive year, with returns exceeding 8%. Longer-duration investment-grade credit struggled due to rising government bond yields. European government bonds outperformed U.S. Treasuries, supported by expectations of a more accommodative policy stance. Despite the challenging environment, U.S. Treasuries still managed a modest 0.6% gain due to attractive starting yields. UK Gilts were among the weakest performers, as their longer duration made them highly sensitive to rising yields. Japanese bonds also lagged following the Bank of Japan’s move to end negative interest rates and yield curve control. In contrast, Italian bonds performed well, returning 5.3% as spreads tightened. Political concerns in France led to a 30-basis point widening of its spreads relative to Germany, marking a significant shift.

2025 Outlook

Looking forward, investors should evaluate whether the trends that drove 2024’s performance will continue. While U.S. economic strength is likely to persist, regional differences and changing policy environments will be key factors. Fiscal and monetary policy decisions, particularly in Europe, could significantly influence market direction. In this context, maintaining diversification and carefully selecting investments will be crucial for navigating what may be another eventful year in financial markets.