Looking ahead to 2025, investors should question whether the same drivers of performance will remain in play.
2024 was another impressive year for risk assets. Continued US strength helped developed market equities deliver total returns of 19.2%, and a late rally in Chinese equities coupled with strong results out of India and Taiwan helped emerging market equities deliver 8.1%. While the performance of US mega cap tech ensured that global growth stocks dominated for the second year in a row, prospects for deregulation following the US election boosted financials helping global value stocks to rise 12.3% over 2024. Commodities were held back by weak demand in China and the broad commodity index delivered 5.4%. However, concern over the US fiscal direction led to a strong performance from gold which ended the year with returns of 27.1%. Developed market central banks started normalising policy in 2024, but resilient growth and sticky inflation meant markets pared back expectations for how quickly rate cuts would be delivered, particularly in the US. The combination of a strengthening dollar and rising yields meant global investment grade bonds delivered negative returns of -1.7% over the year.
2024 saw US economic performance decouple from the other major regions. Despite concerns over the summer, US economic exceptionalism remained largely intact. GDP growth averaged 2.6% quarter on quarter annualised over the first three quarters of 2024 and the Federal Reserve Bank of Atlanta GDP nowcast is projecting a similarly strong end to the year. The S&P 500 was the top performing equity market with returns of 25.0%, and while the “Magnificent Seven” artificial intelligence (AI) stocks still delivered outsized returns, economic momentum did feed through into a broadening of earnings expectations which is set to continue in 2025.
Conversely, European economic momentum weakened significantly over the year. The manufacturing sector was particularly hard hit due to a combination of high energy costs, damaging regulation, and a lack of export demand, coupled with government subsidised competition from China. This divergence was compounded by political turmoil in both France and Germany where fiscal pressures and the rise of populist parties fractured the political consensus. Economic weakness and limited exposure to AI hindered European equities and in a year of strong equity returns the region underperformed with returns of 8.1%.
UK equities marginally outperformed their continental counterparts with returns of 9.5% as the economy recovered from the 2023 lows. This cyclical rebound was boosted by initial optimism following the election, however the autumn budget, which delivered larger tax rises than anticipated, poured cold water on some of the positivity. The increase in the national insurance tax on employment proved particularly corrosive to business sentiment with surveys in the final months of the year pointing to falling hiring and rising price intentions and leaving the Bank of England in a difficult position.
In Asia, Chinese activity remained weak as the country grappled with falling property prices and weak consumer confidence. Investors were initially unimpressed with the policy response. However, September’s more cohesive policy announcements appeared to convince markets that 2025 would finally see the significant stimulus required to restart the economy and Chinese equities rallied in the second half of the year to deliver 19.8% over 2024. Continued optimism about the end of deflation, coupled with a weak yen and ongoing corporate reforms, helped Japanese equities deliver returns of 20.5% to end 2024 as the second best performing major equity market.
Strong risk asset performance carried over into fixed income markets. High yield bonds were the top performing sector for the fourth year in the row as a combination of high all-in yields and tightening spreads boosted returns to over 8%. Longer duration investment grade credit underperformed against backdrop of rising government bond yields. European government bonds outperformed US Treasuries as the weaker economic outlook translated into greater confidence in the downward direction for interest rates, though the high starting yield did partially cushion US Treasuries which still delivered positive returns of 0.6% over the year.
The first half of 2024 saw broad based disinflation and over the summer central banks felt confident they could start normalising policy. However, the last mile proved harder than markets anticipated and, outside of Europe, investors pared back their hopes for rate cuts. Against this backdrop, global government bonds returned -3.1% over 2024.
Conclusion
Despite the very positive reaction of US equities and the dollar to Trump’s victory, we have pointed out in our yearly outlook “Pushing the boundaries” that there is still a high degree of uncertainty about US domestic and foreign policy, and the policy responses of other regions. While an ‘America first’ policy stance might lead to ongoing US exceptionalism across asset classes, we’d argue that at a multiple of 22x forward earnings versus 13x in Europe, and 12x in emerging markets, a lot of that relative optimism is already priced in. Therefore, a benign global growth environment justifies a degree of optimism for risky assets but valuations give little room for exuberance.
Investors can reflect on a good year. Continued AI excitement drove equities to deliver strong returns, and high starting yields helped cushion bonds from some of the impact of rising yields. This meant a global 60/40 portfolio of developed market equities and investment grade bonds delivered a 10.8% total return. Looking ahead to 2025, investors should question whether the same drivers of performance will remain in play. Our view is that US will likely continue to outperform, but that the AI story will start to broaden, and opportunities extend beyond mega cap tech. However, US equity markets are at lofty valuations and credit spreads are near record tights. Given this, investors may wish to consider how comfortable they are having all their eggs in one basket.