The final quarter of 2024 brought a dramatic shift in the global landscape as we learnt that Donald Trump had won the US election. US equities rallied following the election result, driven by optimism about deregulation and tax cuts, although gains were later tempered by concerns about trade wars and rising inflation, dragging other regions lower too. US Treasury yields initially spiked on expectations of higher fiscal spending under a Republican sweep but retraced some ground as investors digested the possibility of a more fiscally conservative Treasury Secretary. The narrative of US exceptionalism propelled the US dollar to its strongest year since 2001, driving returns higher for unhedged US assets in Sterling and Euro terms.
US equities
US equities were the best performing equity market in the quarter, with the S&P 500 up 2.1%1 and the Nasdaq up 6.2%1, helped by its higher tech exposure. This capped off a strong year in which the S&P 500 matched its prior annual performance, rising by c.24%1 for the second year running. The impressive gains were largely driven by the continued success of the “Magnificent 7” tech stocks, which saw an increase of 67%1 during the year. Market concentration is a risk, with these seven stocks accounting for over 20% of global equity market capitalisation, but this reflects their superior earnings growth, and we are maintaining our exposure to these companies at close to benchmark weight, having increased our weighting materially over the last 18 months.
The US market was dominated by the aftermath of the presidential election. As the quarter ended, the market was digesting the nomination of Scott Bessent as Treasury Secretary, which could suggest a more fiscally conservative approach and perhaps some softening of the administration’s trade positions. However, the prospect of a trade war with China and the impact on global supply chains and inflation remained key concerns. The energy and materials sectors, especially oil and gas, underperformed despite the “Drill Baby Drill” messaging from Trump. Interest rate-sensitive sectors, such as consumer staples, real estate and utilities, also declined as bond yields continued to march higher and investors dialled back their expectations for Fed rate cuts. Current expectations for two interest rate cuts in 2025 look broadly fair.
International equities
European equities declined in Q4, finishing down 4.2%2, with concerns about higher tariffs under Trump and rising political instability raising fears for European exports and economic growth and weighing on sentiment. Some of the largest stocks, such as Novo Nordisk, ASML and LVMH, also had weak quarters, dragging regional indices lower.
Novo Nordisk reported trial results for its new weight loss drug, but despite the results confirming it would be the best drug on the market, it fell 25%2 on the day as the efficacy was slightly below what the market had discounted. We still see this result as positive overall and remain bullish on the growth potential for Novo Nordisk from this new drug. ASML and LVMH’s underperformance was linked to weakening Chinese demand, with the former being affected by export restrictions.
Uncertainty regarding the European Central Bank’s (ECB) policy trajectory and the timing of future rate cuts, given heightened inflation uncertainty and weak economic activity, also added to market volatility. Meanwhile, in France, the government of Michel Barnier collapsed following the first successful no-confidence vote since 1962, just 90 days after taking office. This political upheaval exerted additional pressure on French assets, pushing the spread between the French and German 10-year bond yield to its widest point since the Euro crisis in 2012.
The UK saw the first Labour government Budget in 14 years, with Chancellor Rachel Reeves delivering a classic ‘tax and spend’ budget, as expected. Taxes will rise by £40bn a year, mostly through a rise in employer national insurance contributions, and borrowing will rise by £140bn more over the next five years. UK equities experienced a muted quarter, down 1%3, underperforming global equities. Gilt yields rose during the quarter in reaction the Budget, leading to a negative reaction for equities. Concerns about rising inflation and its potential to hinder economic growth weighed on the market too, whilst uncertainty about the Bank of England’s policy path added to volatility.
The Japanese market was mixed in Q4. An initial rise, driven by a weaker yen and optimism about a continued economic recovery, was later offset by growing concerns about global trade tensions and their potential negative impact on Japanese exports. The Nikkei index finished up 5.2%4 in Yen terms but rose less than 3% in Sterling, US dollar and Euro terms, given Yen weakness. The Bank of Japan’s (BOJ) policy stance, while still accommodative, appeared to be shifting slightly towards a more data-dependent approach, with Governor Ueda emphasizing the need for vigilance on both the inflation and exchange rate fronts.
Elsewhere in Asia, South Korea experienced a ‘Black Swan’ event on December 3rd after the President Yoon Suk Yeol enacted martial law citing national security concerns. This move led to widespread protests and political unrest and resulted in The National Assembly impeaching President Yoon on December 14th, suspending him from office pending a Constitutional Court review. The events are still unfolding and will likely lead to an early election sometime in 2025. The Kospi index fell 8%5 in the quarter leaving it down 11%5 for the year and the worst performing major equity market.
Emerging markets faced a volatile quarter. China, a major driver of emerging market performance, saw a rollercoaster ride, with initial stimulus hopes giving way to concerns about the lack of specific measures and the potential for a trade war with the US, as well as weaker data prints for imports, exports, retail sales and Consumer Price Index (CPI). Chinese equities finished the quarter down 2%6 in the onshore market, whilst the Hong Kong offshore market fell just over 5%7, although both markets finished the year up 15%6 and 18%7 respectively. India, which has been Asia’s best performer in recent years suffered a 7.3%8 fall in Q4, after a weaker earnings season triggered profit taking in an already expensive market.
Bond markets
Fixed income markets experienced a period of significant volatility in Q4. US Treasury yields rose in the aftermath of the election on the expectation that stronger growth and higher inflation would lead to fewer Fed rate cuts. The Fed also pivoted in a more hawkish direction in December; although they cut rates again, bringing their total cuts in 2024 to 100 basis points (bps), they only signalled 50bps of cuts for 2025. The UK gilt market underperformed, with yields rising sharply and the spread between UK gilt yields and those of other major sovereign bonds widening as investors reacted to the UK government’s budget announcement. European bond yields also experienced upward pressure, as Spain’s latest inflation print came in above expectations and fears of a slower cutting cycle grew. Emerging market bonds faced a challenging quarter as the strengthening dollar and rising US Treasury yields increased pressure on debt repayment.
Commodities
Commodity markets experienced heightened volatility during the quarter. Oil prices, after an initial rally on geopolitical tensions surrounding the Russia-Ukraine conflict, experienced a significant decline as the focus shifted to concerns about global demand. Gold declined during the quarter, driven by the strengthening dollar and rising US Treasury yields, whilst Bitcoin (sometimes dubbed digital gold) passed the $100k mark for the first time. Industrial metals, such as copper, also saw declines, reflecting concerns about global demand and the potential for slower economic growth in China.
Outlook
Looking ahead, we expect the global economy to continue to deliver growth in the region of 2.5-3% over the next couple of years. While this is broadly in line with 2023 and 2024, the relative stability masks some major shifts at the country level. Stronger growth in the US is offset by weaker growth elsewhere. Trump’s plan to cut taxes and regulation should boost US growth in 2025 and 2026. However, faster growth may add to the inflationary pressure from any potential tariffs and immigration restrictions, which could mean less scope for interest rate cuts.
Economic fundamentals suggest that 2025 should be another positive year for equities, and we enter 2025 overweight. The challenge is that downside risks are greater than before; the prospect of an all-out trade war looms large, the outlook for interest rates is more uncertain, and government debt continues to rise. It will be important to be nimble with asset allocation in the face of these changing conditions.
Diversification should also help to mitigate some of these risks. In multi-asset portfolios, bonds should provide some protection against risks to growth, while gold and other commodities help to manage the risk of inflation and elevated geopolitical tensions.
Within equities, the US mega-caps continue to deliver from an earnings perspective, but their exceptionally strong performance and high concentration mean ex-US diversifiers are also important. The UK, Japan, and commodity-exposed markets all look attractive today and should help to diversify our equity exposure. The picture is more challenging for Europe and emerging markets, although we are keeping a keen eye on China for signs of improvement.
Read or watch our 2025 outlook here.
1 LSEG Workspace, price return in United States Dollar
2 LSEG Workspace, price return in Euro
3 LSEG Workspace, price return in Sterling
4 LSEG Workspace, price return in Japanese Yen
5 LSEG Workspace, price return in Korean Won
6 LSEG Workspace, price return in Chinese Yuan
7 LSEG Workspace, price return in Hong Kong Dollar
8 LSEG Workspace, price return in Indian Rupee
This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
