MARKET COMMENTARY – JANUARY 2025

Global equity and fixed-income markets reflected divergent dynamics as 2024 closed and investors entered 2025 with optimism tempered by key economic and geopolitical developments. Strong performance in US equities contrasted with mixed outcomes in Europe and Asia, as growth and monetary policy themes dominated the landscape. Commodities experienced uneven demand dynamics, while central banks globally maintained a cautious but steady approach to policy normalisation.

Developed market central banks took further steps toward policy normalisation in 2024. The US Federal Reserve Bank left interest rates elevated but signalled a measured approach to any potential cuts as growth remained resilient and inflation persisted. European central banks, facing weaker economic conditions, leaned more expansionary, offering confidence in rate reductions for 2025. In Japan, a significant shift occurred as the Bank of Japan ended yield curve control and negative interest rates in March, aligning its policies with other developed economies.

US equities delivered an impressive year, supported by continued economic strength and the dominance of mega-cap technology companies. The S&P 500 rose by c. 26% in sterling terms in 2024, with the “Magnificent Seven” AI-focused stocks remaining key contributors. However, the year also saw a broadening of economic momentum, boosting earnings expectations across sectors, including smaller companies. With GDP growth averaging 2.6% through the first three quarters and robust consumer spending, US economic exceptionalism remained intact, setting the stage for another potentially strong year ahead.

European equities underperformed significantly amid political turmoil and weakening manufacturing activity. High energy costs, reduced export demand, and regulatory challenges weighed on the region, with returns limited to c. 5% in sterling terms in 2024. France and Germany faced political fractures, impacting investor confidence, while limited exposure to AI innovation further hindered recovery. The UK equity market saw slightly better performance, gaining 9.5% as the economy rebounded from prior lows. However, an unexpectedly rigid autumn Budget and a tax increase on employment dampened business optimism, leaving the Bank of England navigating complex economic trade-offs.

In Asia, Chinese equities rallied towards the end of the year, fuelled by more cohesive policy measures and expectations for significant stimulus in 2025. Weak consumer confidence and property market struggles persisted, but investor sentiment shifted positively as deflation concerns eased. Japanese equities achieved strong returns in 2024, supported by corporate reforms, a weaker yen, and strong AI optimism, making it the second best-performing major equity market.

Fixed-income markets reflected mixed outcomes, shaped by rising yields and shifts in central bank policies. High-yield bonds continued to lead, driven by high yields and tightening spreads. In contrast, global investment-grade bonds fell slightly, pressured by the strengthening US dollar and high interest rates. UK Gilts were notably weak due to their long duration, while Italian bonds emerged as a bright spot amid tightening spreads in peripheral Europe. Meanwhile, geopolitical uncertainties in France widened spreads relative to Germany, underlining investor caution around fiscal sustainability.

Commodities faced headwinds from weak Chinese demand, with the broad Bloomberg Commodity Index returning c. 7% in 2024. However, gold outperformed significantly, with the S&P GSCI Gold Spot Index rising c. 28%, as fiscal concerns in the US drove demand for safe-haven assets.

As investors look to 2025, the interplay of economic resilience, AI-driven innovation, and central bank policy will continue to shape market dynamics. While US markets remain well-positioned, high valuations and narrow credit spreads raise questions about sustainability. Broader opportunities in global equities, coupled with easing inflation and policy adjustments, offer potential for diversification. Investors are likely to weigh these dynamics carefully as the year unfolds.

Total returns in GBP to 31/12/2024

    *December 2024

Source of data: FE Analytics, www.bankofengland.co.uk, www.ons.gov.uk

This commentary in no way constitutes a solicitation of investment advice and should not be relied upon in making investment decisions. Past performance is not a reliable indicator of future results. The value of your investments can fall as well as rise and are not guaranteed.