Barring any end of year surprises, 2024 is likely to be remembered as a good year for global equity investors. Current performance figures indicate that the MSCI World Index is on track to post double-digit returns, the S&P 500 is doing even better, and the MSCI Europe is modestly positive.
However, the headline numbers belie the rollercoaster of a ride that investors went on this year, which saw the continuation and broadening of the artificial intelligence (AI) boom, the sharpest bouts of volatility since the pandemic, and uncertainty surrounding several high profile elections. We recap the biggest lessons we learned from 2024:
1. More than meets the eye in A.I.
At the turn of the year, when investors considered AI, their minds would often immediately go to the ‘Magnificent 7’ stocks. But 2024 showed us that there is more to the trend than just these seven companies.
This year, we found a number of companies in Europe and Japan which are also heavily exposed to AI along the value chain. With the AI trade extending from purely enterprise software into robotics, industrials, and automation, these regions’ significantly higher weighting to industrials versus the S&P 500 could start to pay dividends.
The growing optimism behind industrials globally was highlighted in the third quarter, when the MSCI Global Industrials Index outperformed the S&P 500 (in USD terms) pointing towards growing momentum for more widespread adoption and integration of AI. Furthermore, this represents a compelling opportunity to diversify from those US AI beneficiaries, while maintaining exposure to the structural trend.
2. Asian equity markets shouldn’t be overlooked
While much attention has fallen on AI and US stocks, Asian equity markets showed in 2024 why they shouldn’t be overlooked. In the early part of the year, Japan was the top performing global market, riding high on a number of corporate governance reforms which the market judged would improve potential shareholder returns. The Japanese economy also displayed signs of emerging from the low growth, low inflation malaise that had plagued it for so many years.
For much of 2024, Chinese and Hong Kong stocks were among the worst performing regions, with the Chinese economy enduring continued consumer weakness and a slowdown in its real estate sector. Following the announcements of a variety of stimulus measures in September, however, Chinese stocks recorded their highest weekly gains since 2008, while the Hong Kong market posted its highest weekly gain since 19981.
Questions may persist over the sustainability of the tailwinds behind the performance of Asian equities: Can the Japanese economy truly move past the era of low economic growth; how far will the Chinese government’s stimulus go in reviving its economy; and what will trade policy and tariffs from the incoming US administration look like? Nevertheless, we believe that for a selective stock picker there are opportunities in this key area of growth for the global economy.
3. History does not repeat itself, but it often rhymes
Given the relatively benign end to the year for equities, it might be easy to forget the sharp bout of volatility in August that took the market by surprise. Without delving into all the events leading up to August’s market rout, it is worth noting how stark the moves were. The 12% intraday decline in Japan’s TOPIX Index on 5 August – its largest one day pullback since 1987 – and the reverberation through markets that sent the VIX on its highest ever intraday spike were reminiscent of moves last seen during the onset of the pandemic.
The market volatility served as a crucial lesson that long-standing trends and seemingly invincible trades, which investors may have become somewhat complacent about over the past decade, can quickly unravel. The unwinding of the Japanese yen carry trade and the pressure on the US dollar's prolonged bull market highlighted the shifting dynamics that investors must navigate. As the Federal Reserve cuts rates, the dollar's dominance may face significant challenges, potentially signalling a shift in market leadership.
Similarly, the Magnificent 7 trade, which had been a reliable source of substantial returns, showed signs of vulnerability. The steep valuations and subsequent pullbacks, exacerbated by high-profile selling, emphasise the importance of careful stock selection and valuation scrutiny.
4. Preparing for a returning Trump administration
Elections across the globe took centre stage in 2024, with several high-profile votes drawing attention. In November, the focus was on the US election results, which saw a Republican victory and a second term for Donald Trump.
From Trump’s first term as president, we learned that his policies can be broadly positive for equity markets. Given the decisiveness of the Republican victory, we expect him to enact business-friendly policies, tax reforms, tariffs and new energy policies.
It remains to be seen if he can turn the various campaign promises into reality as he goes through his second term; politics is not an easy playing field and unseen challenges will doubtless emerge. With that in mind, it is crucial to continue focussing on economic fundamentals and downplaying the shorter-term noise which often dominates news headlines.
Conclusion
As we approach the end of 2024, global investors can rejoice in several positive developments coming through, including the broadening out of earnings from established market leaders and the goldilocks scenario of ‘immaculate disinflation’ still underway. With these factors in mind, staying focused on fundamentals will be key to navigating future uncertainties and seizing new opportunities in the year ahead.