Quarterly Investment Review & Outlook

Investment Review 4th Quarter 2024
Major Asset Class Returns for 4th Quarter 2024, GBP (£) terms.
Trump 2.025 Euphoria and Grinch Powell
(Source: TEAM, Dall. E)
Animal spirits reignited
Animal spirits were reignited in the fourth quarter as Republican candidate Donald Trump completed one of the most remarkable political comebacks in history.
Bob Farrell, investing pioneer and Chief Market Analyst at Merrill Lynch for over a quarter of a century, authored 10 Market Rules to Remember, a concise collection of insights into investor sentiment and crowd psychology that have since been canonised by Wall Street. Amongst them, this little gem: ‘when all the experts and forecasts agree…something else is going to happen’.
Having spent months being (mis)informed by mainstream media channels and widely followed surveys that forecast the US Presidential race on 5 November to be amongst the closest contests ever, Trump stormed to a colossal victory over Kamala Harris, winning every swing state and the popular vote, and sweeping Congress and the Senate in the process.
Euphoric post-election trading set the tone for the rest of the quarter, namely a surge higher in the US dollar and US risk assets. This was led by mega-cap growth stocks on expectations that, 1) the looming threat of a heavy-handed government induced break-up of the technology sector will not materialise, and 2) that American productivity is set to surge higher, driven by Artificial Intelligence (‘AI’) capabilities.
The US and the Rest
More broadly, the prevailing narrative is that the ‘Republican Red sweep’ will usher in faster earnings growth, looser regulation, and lower corporate taxes. An American economy that has already surprised many this year is likely to be supercharged with corporate tax cuts (that feed directly through to bottom line company earnings), and lower interest rates, which should be good news for smaller and medium sized businesses, the key employer of the American economy.
Talk of ‘American exceptionalism’ grew increasingly louder during the quarter, channelling global capital to the US markets and further driving the wedge in relative outperformance versus the rest of the world. On Christmas Eve, the America stock market reached an all-time high as a percentage of the MSCI All Country World Index, at 67.25%:
(Source: Bloomberg, Jefferies Global Research, TEAM)
With the bell weather S&P 500 large cap index, arguably the world’s most important barometer of risk, powering to over 70 new all-time highs in 2024, markets seemingly looked to set to enjoy the fabled ‘Santa Claus’ rally, a persistently profitable seven-day trading period incorporating the last five trading days of December and the first two trading days of January.
‘Grinch’ Powell
Enter the ‘Grinch’, expertly played by Federal Reserve Chairman Jerome Powell during the final US central bank policy meeting of the year on 18 December. A decision to cut interest rates by another 25 basis points to 4.50% was anticipated, but markets took fright following a more hawkish (negative) outlook on the prospect for further cuts in 2025.
Powell acknowledged that inflation is moving ‘sideways’ rather than downwards, but the real doozy was saved for his post-meeting press conference, where he acknowledged that the Fed’s year-end projection for inflation has ‘kind of fallen apart’. The comments, from an institution looking to rebuild credibility and trust following the post-pandemic ‘inflation is transitory’ fiasco, were not well received.
The net result in terms of asset performance was dispersion at both index and sector level as a classic rotation ensued out of old-economy stocks and into mega-cap growth technology (‘MGT’) companies that are currently being viewed by investors as being as safe as government debt. The Dow Jones Industrial Average Index fell for ten consecutive days during December, its longest losing streak since 1974 when Gerald Ford was President.
Ultimately, Powell’s stance suggests that further interest rate cuts are no longer guaranteed, with money markets now pricing just one more cut of 25 basis points from the Federal Reserve in 2025. This view is underpinned by American economic data, whether employment-related or inflation-related, which has remained remarkably resilient throughout this post pandemic cycle.
European political chaos
Moving across the Atlantic, Europe found itself engulfed in a series of political fiascos as governments in Germany and France collapsed under the weight of no confidence votes. The developments are a further body blow for a region already struggling to attract global capital.
Widespread discontent over the perilous state of Europe’s largest economy led to the collapse of Germany’s coalition government in November, paving the way for snap elections in February 2025. Its once thriving manufacturing sector, for decades exemplified by the Mittel stand, faces existential crisis due to waning competitiveness, fading productivity growth, and a loss of access to cheap energy. The country’s structural problems are captured in the ongoing collapse in industrial production:
(Source: Bloomberg, Federal Statistical Office of Germany (Destatis), Jeffries Global Research)
A symbol of the country’s economic decay has been triggered by the relentless rise of China in the electric vehicle sector, forcing Volkswagen’s to announce its first ever closure of factories in Germany in the company’s 87-year history. This outcome was eventually avoided following a lengthy period of horse-trading with unions, but at what cost?
Unlike some of its neighbours, the German government has room to loosen its purse strings to close an estimated investment gap of €600 billion, needed to support industries and upgrade its infrastructure, digitalisation, and education system. With a debt-to-GDP ratio of just above 60%, the possibility of softening its self-imposed constitutional debt brake, or ‘Schuldenbremse’, which restricts borrowing to a maximum of 0.35% of GDP in a fiscal year, will be a central debate in the run up to the election.
In contrast, France is under more immediate pressure to bring its budget deficit down, evidenced in the chart below by a simple comparison of debt-to-GDP ratios with Germany. Newly appointed prime minister Francois Bayrou faces a daunting task, taking over from Michel Barnier whose minority government was toppled after opposition parties rejected his plans to cut spending and raise taxes.
(Source: Deutsche Bundesbank, French National Institute of Statistics and Economic Studies (INESS), TEAM)
The day after Bayou delivered his acceptance speech, the country’s credit rating was unceremoniously slashed by Moody’s, with the rating agency predicting that the country’s debt-to-GDP ratio will reach 120% by 2027 absent meaningful steps to tackle the deficit. The annual cost of servicing the debt will soon eclipse what France spends annually on defence and education. Mon Dieu!
The Labour Party Omnishambles
Closer to home, the day after the Fed announced its latest policy decision, the Bank of England’s Monetary Policy Committee voted to leave the base rate unchanged at 4.75%. Six of the nine members raised concerns over stubbornly high inflation and argued that a gradual path of rate cuts is more appropriate despite the more pessimistic growth outlook.
PM Keir Starmer’s landslide victory on July 4 already seems like a lifetime ago. His ambition to lead a ‘government of service’ has been derailed by an impressive series of distractions and blunders including the summer riots, the ‘Free Gear Kier’ clothing donations scandal, Sue Gray’s departure, and the fallout from the Budget.
Chancellor Reeves’ grand ’tax and spend’ plan was met with derision by markets, with no exciting corporate policies or business incentives to counter the c. £140 billion of additional borrowing required over the next 5 years. The Office for Budget Responsibility called it ‘one of the largest fiscal loosening’s of any fiscal event in recent decades.’
All told, Labour’s leader has overseen the largest drop in public confidence during a party’s first 100 days in power, ever:
(Source: YouGov, latest data 12-13 December)
Based on recent credible UK business surveys that already point to a sharp slowdown in hiring plans and intended capital investment, in addition to a need to raise final consumer prices, it is conceivable that the decision to press ahead with increasing the national rate of insurance may go down as one of the worst UK policy decisions in history.
Equities: Scores on the Doors (all returns in sterling terms)
Developed market equities (represented by the MSCI World Equity Index) delivered a +6.6% total return over the 4th quarter. The S&P 500 large cap index delivered a +9.44% total return, capping a blistering 2024 for American mega caps.
Japan’s Nikkei 225 Index returned +2.86%, as political developments, namely the failure of the ruling coalition to secure a parliamentary majority in the October election, overshadowed encouraging corporate dynamics and the related Tokyo Stock Exchange reform agenda.
European developed market equities ex-UK returned -2.42%, whilst the MSCI Emerging Markets Index returned -1.69%, driven primarily by an air pocket in the semiconductor sector on concerns the incoming Trump administration will severely restrict exports to America.
China delivered a positive return of +3.24% as investors welcomed continued ‘focussed easing’ rather than ‘bazooka easing’. The annual Central Economic Work Conference (CEWC) held in December called for ‘more proactive’ fiscal policy and ‘moderately loose’ monetary policy, whilst urging efforts to ‘vigorously boost consumption, improve investment efficiency, and expand domestic demand on all fronts.’
India returned -3.04% on the quarter, underperforming global and emerging market benchmarks. As one of the best performing emerging market performers in this post pandemic cycle, a combination of elevated valuations in the short-term, particularly in the midcap space, may be capping further price gains, whilst the most recent corporate earnings season triggered the biggest wave of downgrades in several years.
Fixed Interest
Government bond yields trended higher throughout the fourth quarter across markets, albeit for vastly different reasons
(Source: Bloomberg, TEAM)
A cautious Fed
Starting from a higher plateau than the European Central Bank or the Bank of England’s Monetary Policy Committee, the Federal Reserve reduced its policy rate by one full percentage point this year and is now expected to proceed at a much slower pace. Money markets are pricing in just one more rate cut by the Fed in 2025, reflecting Powell’s more cautious tone following December’s decision to cut rates.
The most notable development on the quarter has been the bond market’s reaction to the Federal Reserve cutting cycle. In short, since the day of the first cut, the ten-year Treasury bond yield has risen almost 100 basis points, the opposite of what Powell and colleagues would have expected. It suggests investors want a term premium for investing in longer-term Treasuries because of the growing focus on the unsustainability of America’s government debt position. Dare we whisper a return of the bond vigilantes?
Lagarde turns dovish
Turning to Europe, ‘The direction of travel is clear, and we expect to lower interest rates further’, Christine Lagarde asserted in Vilnius after the ECB cut interest rates for a fourth time this year in December to bring its deposit rate down to 3%.
She added that the ‘darkest days of winter look to be behind us’ in respect of the fight against inflation and revealed some members on the governing council had proposed a larger 50 basis-point cut, reflecting that the Eurozone’s weaker than expected economic recovery poses some downside risks to inflation.
Despite the supportive interest rate outlook, European government bonds declined during the quarter, suggesting investors are more concerned over political uncertainty in the region’s largest economies and the upcoming supply needed to fund fiscal deficits.
The ECB revised its growth forecast for 2024 to +0.7%, and for 2025 and 2026 to +1.1% and +1.4% respectively. The forecasts do not factor in the possibility that the incoming Trump administration will impose tariffs on imports from the EU. Facing a more challenging outlook, money markets are now pricing in quarter point cuts at each of the ECB’s next four meetings between January and June next year:
(Source: Bloomberg, TEAM)
Stagnant UK
In the UK, little surprise to see yields move steadily higher during the quarter as markets weigh up darkening prospects for the economy in 2025 given the dreaded combination of stubborn inflation, particularly within the services sector, and anaemic growth. Most worrying is the ‘business unfriendly’ position adopted by this government so far. Policies that are desperately needed to stimulate activity remain worryingly absent.
The Bank of England currently expects the UK economy to stagnate in the fourth quarter, revised lower than its earlier forecast of a 0.3% expansion, reflecting a downturn in business sentiment since the autumn budget statement. Money markets are now pricing in the BoE to cut interest rates just two times in 2025, taking the base rate down to 4.25%:
Commodities
Gold returned +6.45% on the quarter in US dollar terms, and the performance of the yellow metal remains respectable in the face of rising real yields and a stronger dollar. We have witnessed record central bank gold buying since the third quarter of 2022, potentially triggered by America’s decision earlier that year to freeze Russia’s foreign exchange reserves.
As a result, global central banks bought a record net 1,082 tonnes of gold in 2022, a net 1,049 tonnes in 2023, whilst a net 684 tonnes was purchased in the first three quarters of 2024 according to the World Gold Council. In addition, strong demand from Asia and heightened geopolitical tensions triggered sporadic flights to haven assets. Silver, the ‘white metal’, finished largely flat on the quarter, but delivered an impressive +45% gain in 2024. Robust industrial demand, particularly from the renewable energy sector, led by solar in China, has been driving a structural mismatch between supply and demand that is projected to sustain for some time.
Turning to oil, both Brent and WTI prices returned double-digit gains on the quarter led by a subtle shift in fundamentals, sentiment, and positioning. The US economy continues to hum along, whilst recent easing initiatives in China, if implemented and effective, could be enough to begin rebuilding confidence amongst the Chinese public, stoking growth. Finally, a polar vortex forecasted for January has pushed up the price of natural gas, which should support heating demand through the winter.
TEAM Positioning & 1st Quarter 2025 Outlook
For much of this post-pandemic cycle, the strongest trends have been seen in equity markets, with a key theme the consistent outperformance by the US relative to the rest of the world. That continued in earnest through 2024, as demonstrated by the divergent performances in headline equity returns:
(Source: Bloomberg, TEAM)
With that said, the sailing is rarely flat calm. As with all classic bull market cycles, plenty of pitfalls and hurdles lined the path from ‘point A’ (year-end, 2023) to ‘point B’ (year-end, 2024) to shake out investors, evidenced by frequent market corrections, shown in the chart by the crimson areas. The key was distinguishing genuine market signals from ‘noise’.
A key reason we were able to remain in harmony with these market trends and not succumb to the temptation of short-term profit taking or asset class rotation is on account of the strength of our investment framework. To recap, there are two key strands to our investment philosophy. The first is that we incorporate medium-to-long-term price trends across TEAM’s asset allocation menu as a core process input. The principle behind this is to capture a sweet spot between shorter-term time horizons that can lead to overtrading and using a long enough time horizon that gives meaningful trends the necessary time to express themselves.
Pleasingly, TEAM’s exposure has remained ‘in gear’ with these trends for much of the year, with US mega-cap growth (‘MCG’) and technology stocks comprising the lion’s share of equity exposure across our strategy range. Other pockets of portfolio strength on the quarter originated from exposure to physical gold, Asia equities (in particular, the semiconductor value chain), small capital equities, and US infrastructure equities.
In the case of US infrastructure equities, The American Society of Civil Engineers assigned a letter grade of C- to the state of U.S. infrastructure in its 2021 report card, highlighting the chronic need for major investment. In addition, effective investment in physical infrastructure is one of the most productive uses of a dollar of government spending. Markets continue to anticipate that President-elect Trump and his cabinet will acknowledge this, providing a large window of earnings visibility for companies exposed to this theme.
Note that headline index returns in America mask the disproportional impact from MCG, essentially the Magnificent 7 basket (Alphabet, Apple, Amazon, Meta, Microsoft, Nvidia, Tesla) that delivered a combined 67% for 2024. To give a sense of the impact of US market concentration, for every $100 currently invested in an S&P 500 index tracker, $38 will find its way to just eight companies.
This leads us to the second strand of or investment philosophy, which is the constant pursuit of genuine diversification across asset class, regions, and styles. A seven-stock US equity portfolio is not a credible, pragmatic, multi asset solution in our view.
Given the strength of the US dollar (broadly negative for emerging markets, commodities, any foreign holders of dollar-denominated debt) and US equity markets, there were few places to seek out meaningful uncorrelated returns in the fourth quarter. Perhaps the most pleasing aspect is that exposure to weaker performing areas was modest at best. The ‘sinners list’ of detractors includes several equity positions outside of the US (India, the UK, Europe), global mining stocks, and developed market property.
In our last commentary, we noted that ‘all TEAM MPS sterling portfolios hold a meaningful amount of dollar-denominated assets. We are not currency traders, and exposure to the world’s reserve currency seems to us to be a pragmatic approach in the context of portfolio construction.’ This quarter the dollar appreciated almost 7%% versus sterling, providing a decent return tailwind.
Saints and sinners
What worked: US technology and MCG companies, physical gold, US infrastructure equities, small cap equities, Asia equities, global value equites, Japan equities.
What did not work: Developed market property stocks, India equities, US energy equities, global mining stocks, European equities, UK Gilts, UK equities.
We enter the first quarter of 2025 positively positioned from a risk perspective, with overweight allocations to equities, funded from fixed income and liquid alternatives.
Our asset allocation for the core TEAM MPS multi asset range is shown relative to neutral weightings in the table below:
Equities
We retain what is effectively a ‘barbell’ approach to our equity exposure, with US mega cap and technology as ‘core’, and ex-US equities as ‘satellite’. Also, a preference at this mid-cycle juncture for large cap over small stocks. We acknowledge that a key piece of the puzzle for the AI story remains a meaningful consumer application to justify the extraordinary sums being invested by big technology on semiconductor chips, but in the meantime, companies are making good on impressive revenue and margin growth.
Japan’s corporate governance revolution, driven by the Tokyo Stock Exchange (TSE), is the real deal. The aim is to hold corporate management teams to account over governance and performance issues, with the TSE now maintaining a monthly name and shame list of companies that voluntarily disclose information regarding ‘actions to implement management that is conscious of cost of capital and stock price’. Whilst we do not expect the line to be a straight one from A to B, investors can look forward to the prospect of enhanced returns driven by rising dividends, share buybacks and improved return on equity as companies look to improve balance sheet efficiency.
On this theme, share buybacks continue to surge, rising to a record ¥15 trillion so far, this fiscal year (ending 31 March 2025) compared with ¥8 trillion during the same period last year.
Domestic Chinese equities are showing signs of life in response to the stimulus measures announced in November. Stabilising asset prices, be it the residential property market or indeed the stock market, creates hope that nervous Chinese consumers will start to loosen the purse strings and spend some of the estimated $9 trillion equivalent in increased household bank deposits since the start of the pandemic in January 2020.
India remains one of the world’s most exciting domestic demand driven investment stories. A new capital expenditure boom is underway and anticipated to drive 7% real GDP growth and approximately 12-15% aggregate corporate earnings growth over the next 5 years or more. Given India still miniscule representation in the MSCI World All Country Index of 1.8%, room still exists for a significant re-rating.
In the short-term, further underperformance would not come as a surprise, as the market unwinds some of the froth that has built up during this cycle, particularly in the small and mid-cap space. Encouragingly, domestic inflows into equity markets have continued despite the correction at an annualised rate of c.$100 billion in 2024. This has helped offset a wave of equity issuance from companies seeking to take advantage of lofty valuations.
Fixed interest
We continue to remain sceptical about the pricing of longer-term interest rates in the UK, Europe, and the US. Do 10-year Bund (2.6%), Treasury and Gilt (both 4.6%) yields offer investors adequate compensation for the risks that inflation becomes more structural due to competition for scarcer resources, political risk, and/or for the supply of bonds needed to fund budget deficits? We don’t think so.
Although we are mindful that credit spreads have tightened significantly over the past couple of years, the easy money has clearly been made and there is less juice to squeeze from the trade, credit valuations compared to their longer-term averages do not look too expensive. Furthermore, credit spreads are historically positively correlated to lower interest rates at the start of the easing cycle with companies benefitting from easier re-financing conditions.
Key risks to the constructive outlook include inflationary fiscal (tax cuts) and trade policies in the US which could restrict the Federal Reserve from cutting interest rates further and slow the pace of monetary easing elsewhere. Fed chair Jerome Powell admitted that some members of the FOMC had incorporated these proposed policies into their inflation forecasts at December’s meeting – fifteen of the 19 members see a higher risk inflation will exceed their expectations rather than undershoot them.
Higher government bond yields could also impact returns. Medium-to-long term yields have risen in 2024 despite policy support from the ECB, lower inflation and a weaker economic growth outlook, implying that markets have become more sensitive to high budget deficits and the impact of higher borrowing costs on national debt levels. Governments have given bond vigilantes the whip hand, and it is possible that there will be a greater focus on debt and political stability next year leading to steeper yield curves.
To offset this risk, we will continue to focus our investments on intermediate dated bonds, or the ‘belly’ of the curve, which we think offer the most attractive risk-reward profile and credit spreads can provide a buffer against volatility in government bonds.
Alternatives and Cash
Physical gold and global miners remain essential portfolio insurance in the context of long-term dollar debasement (the loss of purchasing power). The simple case for ownership is that gold has outlasted every stock market in history, and 10kg of the yellow metal will still buy an average family size home, just as it did nearly 100 years ago.
Peering into what the next presidential cycle might hold in terms of monetary policy, Trump has not yet demonstrated a willingness to credibly address the elephant in the room, the enormous, and growing, US debt mountain, which currently stands at 36.3 trillion dollars, excluding unfunded liabilities. That is an astonishing $650 billion of debt added since our last quarterly publication:
(Source: USdebtclock.org)
Gold continues to shine, with the price touching new all-time highs during the quarter across many major currencies. Shown the chart below, 2024 (purple dot) was the only year on record where gold managed to rally by more than 25% (x-axis) whilst the US dollar also rose by more than 5% (y-axis). This behaviour to us is extremely healthy:
(Source: 3Fourteen Research, TEAM)
As for the energy commodities basket, and oil in particular, we noted during our prior commentary that ‘the outlook is less bullish, but with that said, exogenous shocks, particularly of a geopolitical nature, are not out of the question. Energy equities continue to offer genuine asset and sector diversification.’ Given very negative hedge fund positioning in the space, and possible bullish catalysts previously described, we anticipate adding further exposure during the quarter.
As always, rather than attempt to look around corners and predict outcomes, we rely steadfastly on our systematic investment process, which has successfully navigated an array of market conditions during this post-pandemic cycle and delivered respectable risk-adjusted returns for our investors.
Thank you for your continued support and interest in TEAM.