Equity markets saw meaningful regional variations in December with developed market equities treading water and emerging markets posting moderate gains. US equities ebbed between gains and losses for much of the month.
Resilient labour markets and better than expected corporate earnings have buoyed sentiment in recent months while, despite delivering the much-expected cut to interest rates, the final Federal Reserve policy meeting for the year was accompanied by a far more cautious tone on inflation. This caused markets to reprice expectations for the future path of interest rates, which ultimately caused both bonds and equities to end the month lower.
European markets faced headwinds as activity data pointed to stagnating growth, particularly in Germany. The UK underperformed due to its higher exposure to cyclical sectors which underperformed the broader market. The tone in Asia was more positive given Chinese policy announcements of stimulus measures to support economic growth, while Japan’s markets benefited from a weaker yen and robust export data.
The change in interest rate sentiment due to lingering inflation concerns caused bonds to lose value, more so with longer-dated bonds than shorter-dated bonds.
As we move into 2025, US inflation may face some upward pressure given continued economic strength and with the inflationary trade policies of the incoming administration.
Meanwhile, Europe is more exposed to rising energy prices and potentially weaker growth. We expect a couple of additional rate cuts in developed markets after which we may see central banks pause to watch and see how the global economy evolves. If economic growth continues and inflation moderates, we are likely to gradually increase our exposure to long-dated bonds. But we aren’t in any particular rush, especially considering the higher government spending plans across most developed markets which are set to increase government debt levels, leading to higher debt servicing costs and which could be tested by the market.
In equity markets, performance and aggregate earnings have been dominated by US mega cap technology companies for so long that we worry about the risk of complacency given market expectations for continued earnings growth. We don’t oppose this view, but we do think its plausible to see earnings growth accelerate in other parts of the market which would be beneficial to the returns of the active managers in our portfolios.
The incoming US administration does add a high degree of uncertainty to the investment outlook. Although we expect Trump’s policies to be broadly positive for US companies, the threat of tariffs looms large and will cause pockets of instability in various markets from time to time. This means a balanced and diversified portfolio is still key, which is a position we have kept for the last several months, staying close to our long-term strategic allocations.
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