Monthly Commentary – January 2025

While 2024 was another impressive year for many stock markets, a spate of profit-taking meant that December proved to be rather a damp squib.

Central banks in developed economies started cutting interest rates in 2024, but resilienteconomic growth and stubborn inflation became more evident towards the end of the year. This led to markets scaling back expectations of how quickly rate cuts would be delivered, particularly in the US. In addition to inflation worries, investors became concerned that incoming US president Donald Trump’s intended policies will lead to a widening budget deficit and increasing global trade tensions.

Although the Federal Reserve (the Fed) cut interest rates by 0.25% (to a 4.25-4.5% range) at its December meeting, Chair Jerome Powell said that to make further rate cuts the bank will need to see evidence of lower inflation. The dominance of the US in global equity markets was highlighted by the S&P 500 returning 25% (in US dollar terms) in 2024. Amid heightened geopolitical uncertainty, the gold price has also risen significantly. An ounce of gold now costs around $2,640 (at the time of writing, 07/01/25) compared to $2,071 at the start of 2024. It is highly unusual for gold and the S&P 500 to perform so strongly at the same time.

As a team, we continue to believe that a benign global growth environment will be supportive across asset classes. However, in our view yields* are now at levels where bonds look more attractive in relative terms. In equities, there are continuing signs of the ‘broadening out’ theme supporting other stock markets, which have previously been eclipsed by the largest quoted companies in the US

United Kingdom

Patience is a virtue

We remain positive about UK equities, although this optimism is being tested. UK inflation remains stubbornly above the 2% target of the Bank of England (BoE), with the latest Consumer Prices Index (CPI) data showing prices rose by 2.6% in the year to November, the highest increase for eight months. This led the BoE to hold interest rates at 4.75%. Governor Andrew Bailey was also cautious about the year ahead, stating the bank “can’t commit to when or by how much we will cut rates in the coming year”. At the same time, the BoE downgraded its forecast for growth (or the lack of it) to zero for the final quarter of 2024, suggesting an increased risk of a ‘stagflationary’ environment in 2025. Stagflation is a combination of stagnant economic growth and heightened inflation.

‘ Despite a subdued December, it was another strong year for US equities, with the S&P 500 gaining 25% in 2024, surpassing a 20% gain for the second year in a row.’

United States

Full steam ahead for US equities

Despite a subdued December, it was another strong year for US equities, with the S&P 500 gaining 25% in 2024, surpassing a 20% gain for the second year in a row. Returns were largely driven by investor expectations for artificial intelligence and the anticipation of interest rate cuts.

The Fed’s 0.25% rate cut in December was widely anticipated and was the third interest rate cut of the year. However, Chair Jerome Powell indicated that policymakers would be more cautious as they considered further cuts. His repeated warnings about the need for caution spooked investors. Markets are now pricing in just two 0.25% cuts in US interest rates this year.

Europe

Meeting by meeting

The European Central Bank (ECB) was the first major central bank to cut interest rates, with a reduction in June, followed by further cuts in September and October. A fourth reduction of 0.25% at the December ECB meeting took interest rates to 3.0%, amid concerns about a weaker growth outlook for the Eurozone and Trump potentially imposing tariffs on the region’s export heavy industries. ECB Chair Christine Lagarde says the bank is continuing a meeting-by-meeting approach to decisions on rate cuts.

Political instability continued in France, with the government collapsing after Prime Minister Michel Barnier was ousted in a vote of no confidence.

Japan

Optimistic outlook

Japanese equities ended 2024 with positive returns in December and capped off a buoyant year for the country’s stock market in local currency terms. However, the yen has experienced another period of weakness against the US dollar, eroding returns for UK and US investors. Forecasts for 2025 are positive for the region and we will be watching closely for opportunities.

Asia and Emerging Markets

China gets serious

Asian stock markets experienced mixed fortunes in December, with China and South Korea at the forefront of investors’ minds. Chinese policymakers shifted their monetary policy from “prudent” to “moderately loose” for the first time in 14 years. Investors took this as a sign Beijing is getting serious in its response to economic headwinds such as a faltering property sector and deflation risks.

Economic stimulus measures have shown early signs of stabilising the Chinese economy. However, structural issues, including declining birth rates and high levels of local government debt, remain critical challenges.

South Korea faced heightened political instability, as President Yoon Suk Yeol declared martial law, leading to a political crisis and market jitters.

At a regional level, Asian equity markets were under pressure because of a strong US dollar and US interest rates remaining high. The prospect of increased trade tensions between the US and China added to the uncertain picture.

Fixed Income

Santa Claud did not come to town

Bond investors hoping for a strong run in December, a so-called ’Santa rally’, would have been disappointed. The positive performance seen in November was reversed, and then some. This weakness in bond markets was the result of lower levels of market activity, mixed economic data, reduced expectations for further interest cuts and growing concern around the possible implications of Trump’s re-election.

Yields on ten-year US government bonds pushed up past 4.5% to reach their highest levels since April. UK government bond yields were dragged along for the ride, despite weak economic data and investor concerns about the nation’s public finances and the potential for stagflation. German government bond yields also rose, but by far less, as investors increasingly look to the ECB to rescue the Eurozone’s ailing manufacturing sector.