To say 2024 was an eventful year would be an understatement. In the last 12 months, the world has seen continued and heightened geopolitical tensions, half the globe going to the polls to vote, and inflation and interest rates defying expectations by staying higher for longer.
So, what else affected investors? And what should investors consider looking ahead to 2025?
Key takeaways
- While central banks cut rates in 2024, the speed and size of further cuts looks uncertain due to expansionary fiscal policies around the globe.
- Equity markets look set to continue on their upward trajectory, with an increased broadening out of the market.
- Geopolitical tensions remain an investment risk, especially in the Ukraine and the Middle East, due to potential disruption to supply chains and an increase in energy prices.
Key events in 2024
2024 marked a critical turning point for the global economy and financial markets, as major central banks started their rate-cutting cycles - marking a significant shift in policy. While much later than many anticipated, the Federal Reserve (the Fed), the European Central Bank (ECB) and the Bank of England (BOE), all began lowering rates.
When it came to politics, perhaps most notably, the U.S. and the UK unequivocally voted for change. Donald Trump is now poised to re-enter the Oval office in 2025, with Sir Keir Starmer now over 100 days into his premiership in the UK.
Elsewhere, conflict sadly dominated headlines. Escalations in the Ukraine and the Middle East, and the impact of those escalations, are rightly causes for concern for investors. These conflicts have the power to keep energy prices high and cause supply chain disruption, acting as inflationary pressures.
2024 market performance
Bond markets were plagued by volatility in 2024. The uncertainty, which continued to surround inflation and fiscal spending, meant yields were driven higher in the U.S. and the UK late this year.
Equity markets, conversely, remained buoyant, with global stocks delivering strong gains - particularly in the U.S. where the tech sector continued to power markets. For example, Apple, Microsoft and Nvidia were all stand-out performers even though concentration risk remained a concern for investors. The markets did begin to see a broadening out of markets, though, into sectors such as financials and communications.
In the Asia-Pacific region, China and Japanese equities also delivered double-digit returns, though broader economic concerns did temper enthusiasm. The International Monetary Fund (IMF) even revised down growth forecasts for China and Japan in its October World Economic Outlook. But with upgrades for the U.S. and the UK, the IMF anticipates global GDP growth of 3.2% for 2024 and 2025.
2024’s portfolio performance
Against this backdrop, our portfolios achieved strong absolute and relative gains. We had diversified holdings, with a significant allocation to the equity markets. Our relative underweight in fixed income and alternatives further enhanced our performance over the year.
As part of our Strategic Asset Allocation (SAA) review, we made several key adjustments. We reduced our allocation to UK government bonds (gilts) in favour of greater exposure to global bonds. Similarly, we increased our allocation to global equities, leveraging our underlying managers’ expertise to identify promising regions and companies. UK equities were reduced overall, though they remain overweight relative to the global index due to the significant valuation opportunities in this underappreciated market.
Looking ahead to 2025
Encouragingly, signs of global reflation (when an economy recovers after a period of difficulty) are starting to emerge. In fact, with looser fiscal and monetary policies, growth in 2025 is expected to accelerate.
Economic growth and inflation
While interest rates are widely expected to fall, the speed and amount of cuts currently priced into markets may be overly optimistic. Trump’s return may delay Fed action as, while his leadership should increase nominal U.S. growth, that growth will be driven by tax cuts, deregulation and fiscal stimulus. Given the higher resulting deficit and increased inflationary pressures, the Fed may not, therefore, have room to cut rates as quickly as many previously thought.
There are many similarities over in the UK and Europe. Inflationary pressures remain due to expensive fiscal policies, so a looser monetary stance from the ECB and the BOE may be impeded. Meanwhile, in China, the government’s increased fiscal and monetary stimulus efforts should support global growth while helping to solve the country’s cyclical and structural growth problem.
Risks and opportunities in 2025
Despite anticipated global growth, it’s important to remain vigilant to any persistent and pervasive risks. For example, there could be a US bond market sell-off caused by the prospect of a soaring fiscal deficit and the threat of higher long-term inflation. Furthermore, as briefly mentioned, escalations in Ukraine and the Middle East may disrupt supply chains and increase energy prices. That being said, goods deflation will likely persist due to falling import prices from China, though the threat of a deflationary bust there remains real.
Equity markets, though, will likely see a continued bull market. The broadening out of the market should continue, with cyclicals, value stocks, and small caps expected to outperform. Emerging markets should also have their time to shine, as they would benefit from a stronger China in addition to an easier Fed policy.
Bonds are expected to remain an attractive asset class, due to their sensitivity to interest rates and the potential for moderating inflation. However, challenges such as inflationary pressures and the possibility of financial repression by central banks may temper returns, making a balanced portfolio approach essential.
Investing in 2025
Overall, while there is much to be optimistic about in 2025, the potential for surprise and significant shifts in the macro backdrop underscores the importance of both tactical flexibility and a long-term investment philosophy. In staying disciplined and focusing on long-term opportunities, we can capitalise on evolving trends as well as the uncertainties that will undoubtedly crop up in the year ahead.
For us, diversification and high-quality investments are the key way to navigate an ever-changing environment. As such, we are committed to maintaining a balanced stance in our portfolios, ensuring exposure to high-quality assets in both bonds and equities. Additionally, we will continue to incorporate alternative strategies strategically chosen to diversify our funds with limited correlation to traditional stock and bond markets.
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