A Year in Markets – and how 2025 might compare
The year 2024 was marked by significant events and trends that shaped the global investment landscape. From political shifts to economic fluctuations, investors navigated a complex environment. One of the biggest themes of 2024 was the continued dominance of a cohort of stock closely associated with AI.
At time of writing (20th December) the world global equity index was up 20%, but such was the strength of the ‘Magnificent seven’ that, without their spectacular share price appreciation, the index would have posted an 11% return. An equally weighted index returned a still-credible 7%. Whilst the majority of the Brunel listed market portfolio franchise beat benchmarks, the global equity funds struggled in the face of such concentration.
So, will AI change the world in a time frame that justifies such a market move? As of October 2024, Nvidia’s yearly revenue was £113bn, so its clients clearly think so, but for many the jury is still out. However, it has certainly helped me write this review!*
Political landscape
Many new governments were constituted in 2024 but the most notable vote was the US presidential election, which saw a much bigger victory for Donald Trump than expected and a clean sweep of both houses.
This political shift is very likely to bring about changes in policies related to taxes, trade, and regulation – and perhaps redefine America’s role in the world. These changes are likely to have significant ramifications for companies and, arguably, for the global flow of trade.
There will be relative winners and losers, and cross-currents affecting companies across differing time frames. For example, an extension of Trump’s Tax Cuts and Jobs Act could be supportive in the short term for lofty US multiples, but ultimately such policies are inflationary. They therefore could, as we have seen before, increase the discount rate and put pressure on valuations in the longer term. It is important to note that, unlike tax changes, trade policy can be directly implemented by executive presidential order and so doesn’t have the normal congressional checks and balances.
Deregulation is also likely to be a major theme. Again, in the short term, it would be supportive of markets. Certainly financial institutions – and specifically banks – staged a rally on the news of Trump’s victory.
Closer to home, Labour also won convincingly and, whilst the result is unlikely to trouble global markets, the Labour government’s plans for pension fund reform has certainly sparked a lively debate, as have its plans around economic policy, which have helped push gilt yields back to their Liz Truss highs!
Interest rates and inflation
Central banks around the world continued to grapple with inflation. The Federal Reserve maintained a cautious approach, balancing between controlling inflation and supporting economic growth. The Fed began easing in September with a 50-basis point cut in Interest rates and, in the accompanying statement, made it clear that it has limited tolerance for further economic weakening.
By December, it had cut a further two times, but had pivoted the narrative towards a suggestion that it may now be close to the elusive neutral rate, which signals that rate setters believe they may be near the end of the rate cutting cycle. To me, this signifies, as always, that the efficacy of predictions is very low, even those made by the central bank, with all the additional insights they have relative to mere market commentators.
Global conflicts and market stability
Geopolitical tensions increased in 2024; war in Eastern Europe intensified, with Biden providing permission for US missiles to be used in operations inside Russia. Similarly, the conflicts in the Middle East also showed no signs of ending. Both factors have served to increase the risks of investing, not least because the markets have shown remarkable resilience. Outside of pockets of volatility, they have in aggregate shrugged the risks off, with investors adapting to the evolving landscape. The US dollar did, unsurprisingly, remain strong, however, whilst oil prices surprised many by ending the year largely unchanged.
Looking ahead
This is traditionally the part where I am asked to provide predictions of what is to come over the next 12 months. Predictions are notoriously difficulty and over such a short time frame I would hazard no more than a coin flip!
What can be said, though, is that on the balance of probabilities and based on long-term valuations, it is unlikely that 2025 will be as fruitful a year as 2024 for risk assets. Equity and credit markets are in expensive territory and economic volatility is likely to be higher, given the warm blanket of lower rates and disinflation are more likely than not consigned to the past. Cracks are already beginning to appear in the private credit markets, with defaults rising.
As such, given so much today is invested in private markets, how you perform in 2025 will more than likely be determined by how you invested in 2021-23 rather than what you do in 2025!
* NOTE: The wording of this article is not AI-generated