Welcome to your quarterly investment update from atomos covering October - December 2024.
What moved markets over the quarter?
For investors, the final quarter of 2024 was dominated by the heated US Presidential election of 5 November. While the result was positive for US shares, other markets wobbled on concerns about the impact of possible trade tariffs.
Former President Donald Trump won his second, non-consecutive, term with a Republican sweep of the Senate and the House of Representatives, beating his Democratic rival Kamala Harris. Trump’s election win caused a significant jump in US equities as the markets thought his proposed policies would boost US corporate profitability. These proposals included increasing tariffs on exports from other countries such as China, cutting taxes, and reducing the regulation burden. The US dollar appreciated substantially following the election win. Investors sold US government bonds as the markets factored in greater inflationary pressures as a result of Trump’s policies.
In the UK, the new Labour government announced its first autumn Budget on 30 October. The announcements from Chancellor Rachel Reeves were largely as expected, although estimated government borrowing was revised upwards.
Central banks move to tackle inflation
Changes to central bank policy interest rates were also a key theme over the final quarter of the year. The US central bank, the Federal Reserve, cut the benchmark interest rate in both November and December to bring its target rate to 4.25% - 4.5% by the end of the year. Federal Reserve Chair Jerome Powell indicated that the central bank may cut interest rates at a slower pace than previously anticipated. This is due to persistent inflation concerns, largely due to Trump’s inflationary policies. Central banks make changes to interest rates as a way to control inflation. December’s Personal Consumption Expenditures (PCE) inflation figures came in at 2.4% which was slightly higher than November and above the target inflation of 2%. PCE is a measure of the value of goods and services purchased by US residents, and the most commonly used inflation measure in the US.
The Bank of England also reduced its policy interest rate to 4.75% at its November meeting but then chose to hold steady with no change in December. Annual Consumer Price Index (CPI), which is a standard measure of inflation, rose to 2.6% over November, slightly higher than expected, which was why the Bank of England opted not to cut rates any further.
Political turbulence in Europe
Within the eurozone, the French parliament called and passed a vote of no-confidence against Prime Minister Michel Barnier, just three months after his appointment by President Macron. In Germany, the three-party governing coalition collapsed after Chancellor Olaf Scholz sacked the finance minister following disagreements on Germany’s budget. The European Central Bank (ECB) announced two cuts to central interest rates by 0.25% in both October and December, with the ECB President signalling more cuts to come in 2025.
China’s stimulus ‘bazooka’ misfires
In China, the government unleashed new policy stimulus in the third quarter designed to boost economic growth and restore confidence in its equity markets. However, in the fourth quarter, investors were underwhelmed by the scale of these measures. The possible restrictive tariffs President Trump proposed on Chinese exports also weighed significantly on investor sentiment, causing a downturn in Chinese equities.
The Bank of Japan took the decision not to increase interest rates in December, while equities were supported by strong corporate earnings and optimism around economic recovery.
How did this affect portfolios?
Over the final quarter of 2024, global equities delivered strong performance overall as markets reacted positively to the Trump election win in November, creating a significant uptick in performance of US equities. Global equities, as measured by the MSCI All Country World Index (in GBP terms) delivered 6% over Q4 2024.
UK equities, on the other hand, struggled over the quarter, delivering a marginally negative performance of -0.2% (as measured by MSCI UK, in GBP terms). The main driver of this was the Labour Party’s UK Budget and concerns about its impact on the economic outlook. UK stocks rebounded marginally over November to partially recoup some of these losses. Overall, global equities outperformed UK equities and our greater exposure to global equities compared to other wealth management firms helped our relative performance during the final quarter of the year.
European equities detracted from performance over the quarter, as the political instability across both France and Germany resulted in investors selling European stocks.
Emerging market (EM) equities struggled as the Trump election concerned markets in EM countries given his potential imposition of tariffs and focus on US company earnings growth. Investors in China had particular concerns around the Trump trade tariffs on Chinese exports, negatively impacting the Chinese equity market over Q4. This meant that EM equities underperformed UK and global equities.
Japanese equities delivered a positive performance of 3.3% (as measured by MSCI Japan, in GBP terms), driven by strong corporate earnings reports and more positive sentiment for an economic recovery. There was some volatility due to concerns around inflation and potential interest rate hikes from the Bank of Japan, however Japanese equities finished the quarter on an upward trend overall. Our exposure to Japanese equities outperformed UK equities, contributing to relative outperformance versus our peer group, which tends to have a UK bias.
Government bonds in both the US and the UK struggled as government bond yields ended the quarter higher than the end of Q3, which resulted in a fall in prices as bond yields and prices move inversely. In the US, uncertainty around the election resulted in elevated yields while, in the UK, the Budget speech caused yields to rise as the markets priced in slower central bank rate cuts over the next year. November was able to recoup some of these losses with the Bank of England cutting interest rates, however by December UK government bond yields rose again to end the quarter with overall negative performance.
Across the credit spectrum, high-yield bonds outperformed investment-grade bonds (high-yield bonds offer a higher rate of interest as they tend to be of a lower quality versus investment-grade bonds). This was because the incoming Trump administration is expected to promote corporate profitability, which is positive news for companies with a lower credit quality. Emerging market debt ended the quarter with marginally negative performance as yields increased by the end of Q4.
We use listed infrastructure and real estate investment trusts (REITs) as a way to diversify across a range of different investments and make portfolios more resilient. These asset classes saw mixed performance in the final quarter of the year. Over November, they performed well as US government bond yields fell over the month (typically they perform well when yields fall due to their interest rate sensitivity), while October delivered a mixed performance. However, as US yields increased by the end of December, listed infrastructure and real estate then detracted from relative performance.
Our view on the major asset classes
Equities
Equity markets fell in October after a strong rally during the first nine months but rallied over November. Equity markets were buffeted by inconclusive data on how quickly the US economy is cooling and uncertainty around how quickly the Federal Reserve and other central banks will respond. US valuations continue to reflect expectations of good earnings growth over the next five years, reflecting strong earnings since 2010.
Over the next few years, we continue to expect moderately better value from Japanese markets given the positive impact on fundamentals of a push to improve corporate governance, stimulative policy and good economic growth conditions.
Bonds
We think high-quality credit will perform better than equivalent government bonds in the medium term. Global investment-grade bonds (the highest quality bonds) are pricing in below-average credit losses.
Central banks are focusing on the data. In the US, policymakers seem confident of inflation returning to target by the end of next year. Interest rates in Japan are rising from negative territory, and pressure is mounting for the Bank of Japan to raise rates still further to combat strong domestic inflation and currency weakness.
In the UK, we expect weak economic growth will prompt the Bank of England to cut rates more than markets currently expect.
Real assets
REITs and listed infrastructure indices posted notable gains in November. Within REITs, certain sectors performed well in 2024, including healthcare, self-storage, and retail. Specifically, healthcare REITs have benefited from strong demand for retirement housing. Office REITs, which have suffered from the post-pandemic shift towards flexible working, recovered from their mid-2023 lows to outperform the peer group over the past year.
Overall
Our greater exposure to US and Japanese equities versus UK equities stood us in good stead in the fourth quarter in performance terms.
How do we view portfolio composition moving forward?
We maintain the view that avoiding a UK bias and instead investing globally will promote consistent investment performance. Japanese equities continue to look promising over the medium term. We also believe that holding assets whose returns are not directly linked to traditional equity and bond markets can help lessen the impact of falling markets on your portfolio value.
What do you think of this content?
We always welcome your views. To share your thoughts with us, email feedback@atomos.co.uk.
All investment views are presented for information only and are not a personal recommendation to buy or sell. Past performance is not a reliable indicator of future returns, investing involves risk and the value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested. Any views expressed are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness by atomos. Any expressions of opinion are subject to change without notice.