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Market Commentary: January 2025

The final month of 2024 offered a mixed bag for global markets, capping off a year that was largely favourable for risk assets but ended on a more cautious note. December’s economic pulse reflected a challenging environment, as markets navigated the implications of a shifting policy landscape, persistent geopolitical tensions, and regional economic divergences. Performance across asset classes was mixed, with equities delivering modest gains in some regions but generally underwhelming results overall. Alternatives and bonds faced broad declines, while currency movements highlighted the strength of the dollar against its major counterparts.

The U.S. equity market continued to shine, posting a 10.7% return over the fourth quarter and cementing its position as the top-performing region for the year. December’s performance was bolstered by strong GDP growth and investor confidence in the continuation of Trump’s 2.0 economic agenda. Policies centred on tax cuts and deregulation have invigorated various sectors, with financials and small-cap stocks starting to join the growth alongside the “Magnificent Seven” mega-cap tech giants that dominated earlier the year.

The strengthening U.S. dollar added an additional tailwind for sterling-based investors, appreciating by 6.6% against the pound during the quarter. This currency dynamic amplified returns and underscored the relative strength of the U.S. economy compared to other developed markets.

In stark contrast, Europe ended the quarter as the worst-performing region, with equities declining by 4.4%. The continent’s manufacturing sector faced significant headwinds, including rising costs, weak export demand, and intensifying competition from China. Political instability in key economies such as France and Germany further weighed on sentiment, exacerbating the poor performance of European equities.

UK equities posted a marginal decline of 0.7% for the quarter but managed a respectable near10% gain for the year. December’s performance was subdued as the UK autumn budget introduced higher than expected tax hikes, dampening investor enthusiasm. However, attractive valuations and robust merger and acquisition activity provided a silver lining, hinting at potential upside in the medium term. The first positive net inflows into UK equities in years, observed in November, suggest a gradual shift in investor sentiment toward the region.

Asian and emerging markets closed the year on a weak note, with equities declining in quarter four. Persistent macroeconomic challenges in China—including soft economic data, falling property prices, and concerns over debt sustainability—cast a shadow over the region. Emerging markets also struggled with the ripple effects of U.S.-China trade tensions and a stronger dollar, which discouraged capital flows into these economies. Japanese equities were a notable exception, delivering modest gains for the quarter. The ongoing benefits of corporate reforms and optimism about the end of deflation supported the market, offering a glimmer of hope in an otherwise challenging environment for the region.

Throughout most of 2024, declining inflation enabled central banks to cut interest rates, providing a supportive backdrop for fixed-income assets. However, December saw cracks in this narrative as concerns emerged about the inflationary potential of Trump’s fiscal policies, particularly the reintroduction of tariffs. This shift in sentiment led to weakness across interest rate-sensitive assets, including bonds, infrastructure, and real estate.

Gold, a perennial safe haven, rebounded strongly with a 5.9% gain for the quarter, reaching all-time highs in October before stabilising. The metal’s performance was underpinned by geopolitical uncertainty and continued central bank purchases. In contrast, other commodities faced headwinds as slowing global growth tempered demand.

As 2024 drew to a close, markets exhibited a cautious optimism tempered by emerging risks. The U.S. continued to lead the global recovery, buoyed by robust economic growth and market-friendly policies. However, the divergence in regional performance highlighted the fragility of the global economy, with Europe and emerging markets lagging behind. Looking ahead, the interplay between fiscal stimulus, monetary policy, and geopolitical developments will shape the narrative for 2025. While December may not have ended the year with fireworks, it provided a fitting conclusion to a complex and dynamic year for global markets.

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Market Commentary: December 2024

The world’s economic pulse in November could be summed up in one phrase: risk is back in vogue. After a tumultuous year marked by uncertainty and caution, investors seemed ready to embrace risk across most asset classes, resulting in a month of strong performances, albeit with some notable exceptions.

Leading the pack, the U.S. equity market surged ahead, delivering a stellar 6.2% return (in sterling terms) for the month. This rally came on the heels of a decisive political shift as Donald Trump and the Republicans secured commanding victories in the U.S. elections. Far from the anticipated messy or drawn-out results, the election outcome was clear and immediate, setting the stage for a market-friendly outlook. Investors interpreted Trump’s proposed policies as a signal of economic stimulation through fiscal stimulus, tax reforms, and deregulation, all of which were welcomed enthusiastically by various market sectors.

The U.S. equity market’s standout performance also drove the broader global benchmark to post a 5.3% return for November. Notably, the technology-driven gains that had defined much of the year’s rally began to broaden. The “Magnificent 7” mega-cap tech giants, which had been the sole engine of market returns earlier in the year, shared the stage with other sectors such as financials and small-cap stocks. These shifts suggest that Trump’s fiscal and deregulation plans may breathe life into previously lagging areas of the market, particularly small-cap companies that stand to benefit directly from tax cuts and infrastructure spending.

However, not all regions joined the party. Emerging markets and Europe struggled, posting negative returns for the month. For emerging markets, the looming spectre of increased U.S.-China trade tensions spooked investors, prompting a sell-off. In Europe, Germany’s soft economic data and political unrest in France weighed on sentiment, leading to a decline in continental European equities.

UK equities managed to deliver a decent 2.5% return, bolstered by a flurry of merger and acquisition activity. In a surprising turn, November marked the first positive net inflow into UK equity markets in over 42 months, breaking a consistent outflow trend that had persisted since mid-2019. While it’s too soon to declare a full reversal of fortune, this shift hints at a potential change in investor sentiment toward the UK market.

As central banks across the globe cut interest rates to counter slowing growth and inflation, fixed-income assets saw solid positive returns. Both credit and government debt benefited from the favourable monetary environment, giving investors an alternative avenue for gains. However, the longer-term outlook remains uncertain. Market watchers are cautious about the potential inflationary effects of Trump’s trade policies, particularly the reintroduction of tariffs, which could curb central banks’ ability to continue rate cuts. For now, the fixed-income rally holds firm, but the road ahead may be less smooth.

Infrastructure investments and commodities added to the risk-on narrative, delivering positive returns in November. Commodities, however, had a notable outlier: gold. After hitting all-time highs at the end of October, gold prices fell 1.7% as the appetite for risk assets drew investors away from safe havens. This decline underscores a broader shift in market sentiment as investors moved from a defensive stance to a more growth-oriented outlook.

November’s strong market performance offers a snapshot of cautious optimism. Yet, risks linger on the horizon. The impact of U.S.-China trade tensions, the political landscape in Europe, and the trajectory of central bank policies will continue to shape global markets.

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Market Commentary: November 2024

Global markets faced a turbulent October as a mix of economic, political, and policy-related challenges weighed on investor sentiment. 2024 has seen equity markets deliver positive returns but part of these returns were given up in October. Markets had several things that they looked to address through the month, which included the UK budget, a weaker U.S. jobs report, mixed corporate earnings from major tech companies, and uncertainties surrounding the U.S. election. Additionally, the Federal Reserve’s slower path for rate cuts, ongoing inflation concerns, and fluctuating oil prices due to Middle Eastern tensions added to market pressures, while gold continued to rally on the back of all these market uncertainties.

The dollar rallied over +3% versus the pound during October. This meant that the global equity index and US equities were positive from a sterling perspective, but all driven by movements in the currency markets.

As we move into November, investors are focusing on central bank decisions, potential shifts in fiscal policy, and economic resilience in both developed and emerging markets, all of which could shape the investment landscape for the months ahead.

In the UK, Labour’s first budget since 2010 unveiled plans to increase both taxes and spending for 2025, raising concerns about higher borrowing. UK inflation fell to 1.7% in September, creating an opportunity for the Bank of England to cut interest rates, which they did—reducing the rate by 0.25% to 4.75%. While such moves typically lead to positive returns for bonds, the market reacted differently. UK Gilts and corporate bonds sold off by -2.3% and -1.1%, respectively, as investors had already priced in a faster and more aggressive series of rate cuts than the Bank may now deliver. The UK equity market also declined, with a sell-off of -2.0%.

The Alternative Investment Market (AIM), a sub-market of the London Stock Exchange designed for smaller UK companies to raise capital with less regulation, has faced significant pressure in recent months. Concerns arose that the budget would eliminate key benefits of being listed on the AIM index. However, while the outcome was less severe than feared, the market only rebounded slightly and remains underwater for the year.

In the U.S., corporate earnings offered a bright spot amid broader economic uncertainty. Most S&P 500 companies reported stronger-than-expected third-quarter earnings, supporting investor confidence and marking five consecutive quarters of year-over-year growth. This corporate resilience has contributed to limited recessionary fears for now.

European equity markets were the worst performing region over the month, declining -3%. This was driven by mixed economic data and inflation concerns. However, the European Central Bank’s recent rate cut, its third this year, could provide some relief going forward.

Emerging markets were impacted by a stronger U.S. dollar, with Chinese equities in particular seeing volatility as investors awaited more concrete results from recent support measures. Investors are eagerly anticipating more specifics on potential stimulus measures, which could include increased government spending, new bond issuances, and added support for China’s troubled property sector. China’s fiscal strategy may also be shaped by the outcome of the U.S. election, particularly if Trump’s trade policies affecting Chinese exports come into play.

November is shaping up to be a pivotal month for markets, as President Trump prepares to take office, and his potential fiscal policies begin to affect market expectations. Investors are also watching central bank actions globally, as rate changes continue to guide both stock and bond market dynamics. While the current landscape remains challenging, selective opportunities may arise. Although ongoing economic uncertainty, inflationary pressures, and geopolitical tensions could lead to persistent bond market volatility, further rate cuts are likely to lend support as markets adapt to the evolving environment.

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Market Commentary: October 2024

The global equity markets in September delivered mixed outcomes, influenced by various economic developments across key regions. Interest rate decisions, particularly in the US, played a pivotal role in driving market returns. The Federal Reserve surprised investors by cutting interest rates by 50 basis points—double what many had expected. This proactive move was aimed at countering potential economic weakness. The lower borrowing costs resulted in the US equity market hitting new highs. The question remains whether inflation is fully under control or whether we may see this re-emerge going forward.

Outside the US, China’s economic landscape was another key driver of market activity. Beijing announced an aggressive stimulus package designed to revive its property market and boost consumer confidence. This led to a sharp rally in Chinese stocks, with the Shanghai Composite surging by nearly 16%. However, long-term concerns remain regarding the structural issues in China’s property sector, and if these measures really address the underlying problems.

Commodity markets reacted positively to China’s stimulus, with metals and materials rallying. However, oil prices remained subdued, reflecting weaker global demand. This had a negative impact on the UK equity market, as the FTSE 100 (the biggest listed companies in the UK stock market), has a significant exposure to the energy/oil sector. The UK equity market posted a negative return for the month and underperformed many other developed equity markets.

In Europe, business surveys in September pointed to continued economic difficulties. The Purchasing Managers’ Index (PMI) measures economic activity, and a reading below 50 indicates contraction. The latest reading from the Eurozone was 47.1, firmly indicating the region continues to shrink in terms of economic output.  Official data published on the UK economy also showed the economy shrank. The positive take on this weaker data, is that central banks in the UK and Europe have scope to cut interest rates further.

Inflation continues to decline in both Europe and the UK. Headline inflation in Europe fell to 4.3% and headline inflation in the UK marginally declined to 6.7%. However, core inflation in the UK declined much sharper than expected to 6.2%.  This enabled the European Central Bank (ECB) to cut interest rates to 4%. The Bank of England (BoE) retained interest rates at 5%, but the BoE governor, Andrew Bailey, indicated further interest rates cuts were certainly an option going forward. With inflation declining and interest rate cuts in both the US and Europe, bond markets posted mixed returns – government bonds were slightly negative, while global corporate bonds were the standout in the fixed income asset class delivering a positive return of +1.8%. Lower borrowing costs should help improve corporate profitability.

On the back of the surprise stimulus package within China, the Asian and emerging market equity regions were the best performing over the month, delivering +5.2% and +4.9% returns respectively.  The UK and European posted negative returns of -1.4% and -1.2% respectively on the back of weaker economic data.

Meanwhile, gold continued its strong performance, benefiting from its role as a “safe haven” asset amid falling interest rates, a weaker US dollar, and heightened geopolitical risks. In contrast, oil prices remained subdued despite China’s stimulus, which helped keep global inflation in check—a positive development for many asset classes.

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Market Commentary: August 2024 – Pt2

As many investors headed off on holiday, August presented global markets with a much more turbulent environment, spurred primarily by concerns over a slowing of economic growth in the US. As the month progressed, fears eased, buoyed by more stable economic data and assurances from central banks, particularly the US Federal Reserve. By the end of August, much of the earlier losses had been recovered, allowing equity markets to regain their footing.

Periods of volatility are not unusual in financial markets, but August’s volatility was striking. Global equities saw sharp declines early in the month, as investors grew increasingly uneasy over the resilience of the job market in the US and several large technology businesses that have invested heavily into Artificial Intelligence, but with very little to show for it. Circumstances were further compounded news from Japan of the Bank of Japan’s decision to increase interest rates from 0.1% to 0.25%. This modest increase had outsized consequences, as for many years investors have used Japan as a source of cheap finance: borrowing money in Japan (where interest rates have been very low) and investing it elsewhere (such as the US), in the expectation of achieving much better returns. With higher interest rates in Japan pushing up the cost of borrowing and the opportunity for investors in the US looking a bit shaky, investors began head for the exit. This sudden reversal led to significant selling of Japanese equities, which plummeted as much as 20% before beginning to recover. Investors who had previously benefited from Japan’s low interest rate environment were caught off guard, triggering a wave of volatility across other regions.

While the US grappled with volatility, other markets displayed more resilience. European and UK equities posted gains in August, supported by the belief that the European Central Bank (ECB) would cut rates to counter weak economic data. Despite disappointing corporate earnings from Germany, particularly in its industrial sectors, investors interpreted this as a precursor to further ECB intervention. European equities closed the month of August in positive territory, reflecting investor optimism around the possibility of rate cuts. We have subsequently seen a 0.25% reduction in interest rates from the ECB. In the UK, the FTSE 100 edged closer to record highs, underpinned by strong corporate earnings. However, a stronger pound and weakness in some energy and mining stocks tempered gains.

Amid the turbulence in equity markets, bonds proved a safe harbour, providing much-needed stability to diversified portfolios. US Treasuries performed well, benefiting from growing expectations that the Federal Reserve would begin to lower interest rates. Those expectations came to fruition with a 0.5% interest rate cut after month end. High quality corporate bonds also gained ground, as investors sought refuge from equity market volatility.

Bonds remain a crucial component of portfolios, particularly during periods of economic uncertainty. The promise of more support from central banks further bolsters the outlook for bonds. Should economic growth slow more than anticipated, bonds, especially those of higher credit quality, may benefit from falling interest rates and remain an attractive option for investors seeking stability. While inflation remains a persistent concern, the income generated from bonds has become increasingly appealing, especially as other asset classes experience heightened volatility.

Looking ahead, market participants will continue to focus on central bank policies and geopolitical developments, including the US presidential election and tensions in the Middle East, both of which could have far-reaching effects on financial markets. While uncertainty remains, the underlying picture is cautiously optimistic, with easing inflation and the potential for further interest rate cuts offering support to both equities and bonds as we move towards the end of the year.