2024 has been another eventful year for global economies and financial markets. Key themes have included the commencement of central bank cutting cycles, the continued dominance of the artificial intelligence (AI) theme and resilient economic growth, most notably in the United States. In the second half of the year, political events have taken centre stage. Implications of the newly appointed Labour government’s Autumn budget and the prospect of Donald Trump regaining control of the White House have been foremost in market participants minds. Clarity on key election outcomes and data supporting the thesis for a soft landing for global economies have resulted in financial markets climbing a wall of worry against the risks considered at the turn of the year. Outside of China and some patchier data in Europe, global growth has generally surprised to the upside and recession fears have subsided. Optimism on more accommodative monetary and fiscal policy has also supported risk assets. Led by the US, global equity markets have returned 21% year-to-date, with the UK, Japan and China all producing double-digit returns in local currency terms. Softer energy prices have supported a moderation of inflation data, however the gold price has continued to hit fresh highs buffered by ongoing geopolitical risks, budget deficit concerns, and central bank buying. As we approach 2025, overall market sentiment remains sanguine, however investors should be cognisant of complacency and mindful of newer risks on the horizon.
Following a period of exceptional performance of the technology related group of companies known as the “Magnificent Seven”, we had expected to see a broadening of markets in 2024. Although a divergence in performance of these companies has been observed, with three of the seven underperforming the S&P 500 year-to-date, the AI theme has continued to drive performance in the initial beneficiaries of AI adoption trends. GPU chip designer NVIDIA, the current prime beneficiary, saw revenues jump 126% in 2024 from the previous year with the share price appreciation (+188% year-to-date) making up over 20% of the S&P 500’s yearly gain. We believe AI adoption will continue to become mainstream and that the theme is a durable one. We do remain sceptical however that significant valuation premiums on many of the more obvious beneficiaries are sustainable. AI has the potential to impact all sectors over the next decade and we believe positioning for further broadening to high-quality beneficiaries with less demanding valuations is a more prudent approach. This involves considering the whole AI value chain, market-capitalisation spectrum and companies poised to benefit from AI integration. More generally, as the year has progressed, we have also seen some catch-up from small cap stocks both in the US and globally. We believe a continuation in mean reversion is likely from the current valuation extremes of large-cap to small-cap equities.
The run up to the US election was one of the most polarising on record, with polling extremely tight and the result expected to be on a knife-edge. For investors, the key considerations included taxes, trade, immigration, and regulation. Trump’s agenda had been built on tax cuts, reversing immigration, protectionist tariffs and reducing regulation. In contrast, Harris’ agenda involved tax increases, an expansion of regulatory intervention, and a more balanced trade policy. The Republican clean sweep swiftly removed the uncertainty of a potential long, drawn-out results process and added further fuel to the unshakeable US equity market rally we have seen over the previous two years. Attention has now turned to the potential policies that Trump could begin to put in place. While Trump does have a history of using aggressive tariff threats as a negotiation tool, the potential for a re-intensification of trade tensions remains a wild card and key risk for 2025. Several unknowns remain on the magnitude of tariffs imposed, the countries impacted and on which products. We expect this to be an area that is top of mind for investors as new information enters the public domain and further clarity on policies is provided.
On this side of the Atlantic, the Labour Party’s Autumn budget delivered large increases in spending, taxation and borrowing. After repeat warnings from Prime Minister Keir Starmer of a “painful” first budget from the new government, the announcement included a few more compromises than many had expected. Despite a rise in the tax take of £40bn, predominantly coming from a rise in employer national insurance contributions, increases to Capital Gains Tax and Carried Interest were lower than had previously been anticipated. Fears that Inheritance Tax relief would be removed for AIM shares also saw some compromise, with the relief applied cut in half to 20%. Overall, with a £100bn increase in government spending over the next five years, contributed to by further borrowing, this was an expansionary budget. With a continuation of relentless deficit spending on both sides of the pond, we are mindful of how this may feed through to inflation and the direction of interest rates. The longer-term sustainability of loose fiscal policies no doubt increases the risk of higher yields and is a factor we are watching closely.
Although we are vigilant to the developing risks in global markets, our central thesis and the essence of our investment approach are unchanged. We believe that an investment process that is centred around fundamental analysis, but also accounts for potential macroeconomic risks through purposeful diversification, should be best placed to deliver attractive risk-adjusted returns. Our bond allocations continue to serve a purpose as protection against growth shocks while providing attractive yields again. We also believe real assets such as commodities continue to play an important role as protection against inflation shocks. Within equities, we are mindful of concentration risk, the potential for excessive optimism and higher premiums in certain areas of the market. Although valuations are not always a useful timing tool, history has repeatedly reminded investors that the price you pay matters.