Market Overview

Summary of world markets in December

Global equities retreated in December as the hoped-for Santa rally failed to materialise. Concerns about inflationary pressures now and in the future unnerved bond markets, spurring further increases in government bond yields. The Federal Reserve’s more hawkish tone (despite another interest rate cut) served to confirm these worries. Equity investors were also in a more cautious mindset as they reflected upon the scope for future returns after another excellent year for US indices and the prospect of policy unpredictability under the Trump administration.

UK economic activity stalled in the second half of the year and October’s GDP print of -0.1% was worse than expected, with the run-up and aftermath of the Autumn Budget weighing upon consumer and corporate sentiment. The CBI reinforced the point that firms will have to pass on the payroll tax hike through higher prices, lower wage growth and more cautious hiring. Indeed, its survey indicated that headcount is due to be cut sharply in the coming months, with hiring intentions at their weakest since October 2020. Retail sales were flattered by a robust Black Friday period, but the British Retail Consortium reported that overall, retail performance in the fourth quarter was underwhelming. The annual inflation rate edged up to 2.6% in November, the highest rate in several months. The Halifax reported that its House Price Index had risen by 3.3% over the year to December, although indicated that prices softened towards the end of the year. With unrelenting demand for housing, the long-term supply problem continued to support prices over the year, despite affordability issues and still elevated mortgage rates. However, lenders highlighted that assessing the strength of underlying demand has been complicated by the change in stamp duty thresholds this coming April, with purchases likely to be pulled forward.

UK equities lost ground, although fared better than global and US equities in base currency terms. (Sterling weakness enhanced the currency-adjusted returns from other markets, notably those with a US dollar base.) The blue-chip index underperformed mid and small-cap indices, which made up some relative ground after the Autumn Budget-inspired weakness. For the year overall, the total return of the UK market was close to double digits, although there were dramatic differences in the returns from different stocks and sectors.  The banking and tobacco sectors were highlights, while retail, industrial, energy and mining stocks were amongst the laggards. There was much handwringing about the shrinkage of the UK stock market, with the number of companies delisting due to takeovers far outweighing the number of initial public offerings. According to EY, the total number of listings on the main market and AIM totalled just 18 this year, the lowest number since 2010. Many companies also transferred their primary listing away from London, with the US proving to be particularly attractive due to deeper capital pools and higher trading volumes.

US equity markets faded at the end of the month and market breadth deteriorated, with more index names declining rather than advancing, signalling that the foundation of the stock market rally was weakening. Specifically, the strength of the mega-cap technology stocks effectively offset softer prices elsewhere in the market. Reinforcing this picture, mid and small-cap indices suffered steep falls during December.

Asian and emerging market indices lost ground after a difficult quarter. The Korean market suffered a sharp decline due to extraordinary political events in the country, which forced the Bank of Korea to inject liquidity to stabilise markets. Brazilian assets suffered heavy declines due to a deepening fiscal crisis.  More positively, the Chinese and Taiwanese markets gained ground.  Indeed, the Chinese market posted its first annual advance since the pandemic, while Hong Kong stocks also enjoyed a very strong year. The Japanese market also bucked the negative trend, posting a strong monthly return, assisted by a weaker yen which boosted the earnings outlook for large-cap exporting companies.

Looking back at the year overall, global equities delivered impressive positive returns. US equities were the major contributor to this positive outcome, although most equity markets ended the year in the green. The backdrop of falling interest rates, a better outturn for global economic activity than expected (thanks mostly to the US) and added impetus from a major investment theme in the form of artificial intelligence, helped markets to overcome the worries associated with conflict in the Middle East, the ongoing war in Ukraine and tectonic shifts in global political leadership. Indeed, this has been the best two-year run for the main US index since the late 1990s, the time of the “TMT” (technology, media, telecom) boom.  Powering this outcome were the “Magnificent 7” stocks, which, according to Deutsche Bank, rose by an incredible 67%

Government bond yields rose over the month, ending a difficult quarter despite the backdrop of falling interest rates. The main reason for this counter-intuitive behaviour was the perception that the inflation genie has not been tamed as decisively as had been hoped. Although measures of inflation have fallen dramatically from the post-COVID era extremes, central bankers have proceeded with caution because inflation remains stubborn in some parts of the economy. Longer-dated UK gilts fared badly, while the returns from short-dated gilts were only mildly negative.

Corporate bonds outperformed sovereign bonds but were impacted by the volatility in their government peers to varying degrees, according to their credit quality and interest rate sensitivity. By the year end, credit spreads (the additional yield available to compensate investors for the risk of investing in individual companies) were extremely narrow as demand for the asset class remained strong. Although history shows that credit spreads can remain tight for extended periods, current valuations provide very little room for error, meaning that bond prices are vulnerable to company specific or general economic headwinds.

Reflecting upon the year overall, higher yielding bonds were the place to be, and broadly, they delivered attractive total returns. Pockets of the investment grade bond market fared well, but overall, it was a lacklustre picture here. Finally, sovereign bonds were disappointing as rate cuts were less forthcoming than the market had expected and inflation more persistent.

Sterling fell against the US dollar, which was more a reflection of the strength of the world’s reserve currency than upon sterling itself. The euro slipped to its weakest level against the dollar in more than two years, with deteriorating economic conditions and interest rate differentials weighing upon the common currency. As for the US dollar, it achieved its strongest annual close since 2001 on the back of the US “exceptionalism” narrative (a resilient economy, expectations of growth-friendly policies under President Trump, strong companies), as well as higher US treasury yields.

The gold price lost some ground over the month. However, after a 27% rise, 2024 proved to be a vintage year for the precious metal. This move was fuelled by US monetary easing, ongoing geopolitical tensions and record quantities of buying by central banks. Latterly, the stronger US dollar (making gold more expensive) and higher bond yields (a competing asset) pared buyers’ appetit

The oil price rose in December, rounding off a modestly negative year for the commodity.  OPEC+ decided to maintain production curbs, which supported the price. New geopolitical tensions in the form of events in Syria also had an impact, as did additional sanctions on Russia and Iran. Hopes of an improved demand backdrop in China was another positive for the commodity.

Bitcoin blasted through the $100,000 level in response to expectations that Donald Trump’s administration will be more inclined towards an official recognition of cryptocurrencies as a viable and legitimate store of value. However, on this latter point, in the absence of a framework for a fundamental assessment of value, as well as regulatory discomfort (at best), the professional investing community remains largely on the sidelines.

Looking ahead, the new Trump administration is the key preoccupation for global investors. US markets are cheering the idea of “America first”, but policy extremes have consequences. Professional investors are loathe to make any predictions on this score, or to position their portfolios for any single outcome. Investors will also be watching the path of interest rates carefully, while the weeping sore of runaway sovereign deficits has not gone away. Valuation-wise, the focus is upon the highly valued US mega-cap stocks and whether their lofty prices can be maintained and earnings expectations met. Elsewhere in the world, valuations are broadly within normal ranges, as – arguably – they should be, when seen through the lens of challenged growth in many regions.