Welcome to our latest investment commentary. In this edition, we review the final quarter of 2024, provide a round up of the year, and share our outlook for 2025.
2024 ROUND UP
2024 turned out to be a surprising year for asset returns, with economic growth exceeding expectations and central banks finally beginning to ease monetary policy through rate cuts. At the start of the year, the outlook was bleak. Many analysts forecasted a recession as the global economy grappled with the lingering effects of high interest rates imposed to combat inflation following the COVID-19 pandemic and the Russia-Ukraine conflict. Despite these concerns, US stock markets rallied impressively, driven by optimism in specific sectors and a resilient macroeconomic backdrop. The S&P 500 delivered a 25% return, achieving the rare feat of back-to-back annual returns above 20%, a milestone last seen in the late 1990s.
This stellar performance was predominantly fuelled by the surging excitement surrounding artificial intelligence (AI). Since the release of ChatGPT in late 2022, investor expectations for AI’s transformative potential have grown exponentially. Major US technology companies, often referred to as the “Magnificent 7,” seized this opportunity by heavily investing in AI infrastructure—an area requiring significant financial resources that only a few firms could afford. As a result, these tech giants delivered a combined return of 63% for the year, contributing over half of the S&P 500’s total performance. Outside the US , stock market returns were mixed across the board as the US technology giants stole the show. The S&P 500 Equal Weight Index underperformed the market-weighted index by 12%. The FTSE 100 returned 5.7%, the Hang Seng delivered a strong performance with a 26.6% gain following a stimulus package boost, the TOPIX achieved a 9.7% return, and the Euro STOXX 600 ended the year with a return of 4.51%.
With mixed performance across regions, the anticipated rate-cutting cycle unfolded at a slower pace than initially expected. Early in the year, markets predicted aggressive rate reductions to counteract a looming recession. However, with inflation proving to be stickier than expected. central banks adopted a cautious approach. Interest rate cuts began mid-year but were less substantial than markets had hoped. Heading into 2025, the narrative of “higher for longer” interest rates is gaining traction due to persistent inflation risks, exacerbated by Trump’s proposed tariffs and ongoing geopolitical conflicts.
The divergence in central bank policies led to notable volatility in financial markets. For example, during the “August wobble,” contrasting interest rate decisions in the US and Japan prompted the unwinding of the Yen carry trade, disrupting currency and equity markets. Meanwhile, gold emerged as a standout performer, returning 27%. Central banks, particularly in Asia, ramped up their gold purchases to safeguard assets against potential government seizures, as seen in the aftermath of the Russia sanctions. This trend, coupled with ongoing Middle Eastern tensions, solidified gold’s role as a safe-haven asset.
Cryptocurrencies also had an exceptional year, with Bitcoin leading the charge as the best-performing asset of 2024, delivering a staggering 120% return. The rally began with the SEC’s approval of the first US Bitcoin ETF, which heightened institutional interest. Momentum accelerated as Trump’s campaign endorsed Bitcoin, culminating in a significant post-election rally fuelled by speculation of a potential Bitcoin reserve currency.
In 2024, nearly half of the global population participated in elections, with over 70 countries holding national votes, marking it as the largest election year in history. Notably, political power shifted in major economies like the US and the UK, setting the stage for significant policy changes that are expected to reshape the business landscape.
Q4 REVIEW
The fourth quarter of 2024 was marked by heightened volatility, largely driven by the US presidential election. The quarter saw mixed performance across asset classes. US equities performed well, supported by Trump’s victory, which markets interpreted as a pro-business outcome. His promises of deregulation and tax cuts triggered a strong post-election rally in US stock markets. However, fixed income markets faced challenges. Concerns over Trump’s fiscal policies, including tax cuts potentially increasing the budget deficit, led to a rise in US Treasury yields, negatively impacting fixed income returns. Inflationary pressures tied to Trump’s tariff policies further complicated the outlook for bonds, with portfolios holding higher allocations to fixed income eroding the equity returns.
Late in the quarter, euphoria in equity markets gave way to a correction. In December, the Federal Reserve cut rates by 25 basis points but signalled fewer cuts in 2025 due to persistent inflation concerns. This shift dampened expectations for monetary easing, leading to a brief selloff in US markets. The S&P 500 declined 3% during this period, reflecting concerns about the potential economic impact of sustained high interest rates.
Within the Carrington portfolios, we implemented strategic adjustments following Trump’s election victory. The initial post-election rally provided an opportunity to reassess our US equity exposure. While the market’s response was overwhelmingly positive, valuations reached elevated levels, prompting us to adopt a cautious approach. We increased exposure to US equities in anticipation of further gains leading up to Trump’s inauguration but remain vigilant about the risks associated with high valuations and the eventual implementation of Trump’s policies.
2025 OUTLOOK
Geopolitics
Geopolitical tensions continue to dominate the global economic landscape. The ongoing conflict in the Middle East poses significant risks, particularly regarding oil prices, which remain highly sensitive to developments in the region. Elevated oil prices could reignite inflationary pressures, but the Carrington portfolios are well-positioned to mitigate such risks through strategic commodity exposure. Trump’s assertion that he can swiftly resolve the Russia-Ukraine war adds another layer of uncertainty, as markets and governments await his approach.
China remains a focal point under Trump’s administration, given his emphasis on addressing the US-China trade deficit. As China implements large-scale stimulus measures to stabilize its economy, the country’s policymakers are likely adopting a wait-and-see approach in anticipation of Trump’s negotiating tactics. While Trump has expressed a preference for US stock market outperformance, he may prioritise trade imbalances over short-term equity gains, creating potential headwinds for US and Chinese markets. Despite these challenges, we see compelling long-term opportunities in undervalued Chinese companies and have selectively increased exposure in our portfolios.
The UK
Since Labour’s rise to government, there was considerable anticipation surrounding Rachel Reeves’ first budget. However, now that markets have had time to absorb the full breadth of policy changes, the response has been tepid. The FTSE 100 has remained flat following the announcement, while gilt yields have risen as investors grapple with uncertainties around funding the proposed additional spending. Inflation concerns have resurfaced, driven in part by an increase in employer national insurance contributions.
Despite these challenges, the UK remains attractively valued compared to its US counterparts, presenting notable investment opportunities. One of our UK small-cap funds continues to demonstrate its resilience by effectively navigating broader macroeconomic concerns while generating strong returns, making this fund a valuable component of the Carrington portfolios.
The USA
The US remains at the centre of global market attention following Trump’s re-election. Optimism surrounding his pro-business agenda has fuelled strong equity market performance, but sustaining this momentum could prove challenging. Trump’s ambitious campaign promises, including extensive tax cuts and tariff reforms, will face practical constraints. The first 100 days of his administration will be critical in shaping market expectations. We remain vigilant, ready to adjust our US equity exposure should valuations become unsustainably high or policy developments disappoint.
Asia
Asia remained relatively stagnant in Q4 after a strong finish to Q3, driven by optimism surrounding China’s initial stimulus measures. However, the subsequent announcements in Q4 introduced only minor policies that had limited impact on investor sentiment. Rumours about potential tariffs under Trump’s administration have kept investors cautious, with many adopting a wait-and-see approach. The Chinese government, too, appears to be on high alert, signalling a willingness to cooperate with the US while also preparing to respond decisively should a trade war materialise. China is expected to remain in a reactive stance as it gauges Trump’s trade strategies. Trump, known for his deal-making approach, may seek to leverage US-China trade relations to achieve broader geopolitical goals, such as encouraging China to distance itself from Russia. This dynamic introduces considerable uncertainty to the region, with clarity likely to emerge only after Trump’s policies are further outlined.
Despite these challenges, China’s equity markets present an attractive investment opportunity. The country’s valuations remain cheap, and while Chinese companies are currently unloved by global investors, many remain fundamentally strong. The government has demonstrated a clear intent to support the domestic economy, and we anticipate that the People’s Bank of China may introduce more substantial stimulus packages once there is greater clarity on trade negotiations. Given this backdrop, the Carrington portfolios have increased exposure to Chinese equities. This strategy is centred on identifying high-quality companies with significant upside potential, while maintaining diversification to mitigate risks in the event of a deteriorating trade environment. This measured approach ensures we are well-positioned to capitalise on any positive developments while protecting against downside risks.
Strategy
Some points to note around our thinking moving forwards, which generally follow the comments in our previous updates:
- With Trump’s election, US prospects appear promising, prompting us to increase our exposure to US equities. However, our original thesis that US valuations are stretched remains unchanged. We remain cautious and are prepared to take profits if market conditions show signs of weakness.
- We remain optimistic about the Asia region. The dominance of US markets has led to a significant concentration of global capital, but if this trend begins to reverse, Asia is well-positioned to benefit from a redistribution of funds. Small indications of this shift have been observed throughout the year. Furthermore, Sentiment towards China is gradually improving, with the region ending 2024 on a positive note despite initial challenges following Trump’s election victory.
- We have been active in managing our longer-duration fixed-income exposure. The pace and scale of rate cuts have been evolving rapidly, leading us to trim and re-add positions as macroeconomic conditions shift. We remain vigilant on bond yields, particularly as government spending shows no signs of slowing.
- Due to market volatility, our core fixed-income holdings remain focused on short-term investment-grade bonds, which have provided steady returns throughout 2024, despite fluctuating yields. Default rates remain low, making credit an attractive opportunity.
- Gold continues to present a strong investment opportunity as central banks resume building reserves through gold purchases. Additionally, a weaker dollar, supported by Trump’s advocacy for trade competitiveness, favours gold. If inflation persists, gold is expected to perform well in this environment.
- We maintain no direct exposure to Europe due to the ongoing Russia-Ukraine war. However, we retain indirect exposure through global equity funds that focus on high-quality companies within the Euro area.
- Our UK exposure remains concentrated in large international FTSE businesses with global revenue streams, shielding portfolios from domestic uncertainty.
Summary
We are pleased with the performance across the Carrington portfolios. Portfolios with a higher equity allocation outperformed those with a greater focus on bonds, largely driven by the impact of Trump’s election. His pro-business policies and the potential for a large budget deficit played a significant role in shaping market dynamics, especially towards the end of the year.
As we move into 2025, our portfolios are well-positioned to adapt to the shifting macroeconomic environment. We remain committed to identifying new opportunities while carefully navigating the challenges and uncertainties in the current landscape.
CHANGES MADE
We made some changes during the quarter. A full account of the changes can be found below:
We hope you find this review insightful and, as always, we welcome any questions or discussions you may have.
