Our investment experts delve into the key trends of December 2024, highlighting the impact of central bank rate cuts, the AI-driven surge in US mega-cap stocks, and the political shifts from a year of unprecedented elections.
Top three investment trends
1. Central banks begin cutting rates
In 2024, developed market central banks finally began to cut rates as inflation returned towards target levels. However, these cuts were more gradual and of a smaller magnitude than investors had expected at the start of the year. Starting in September, the US Federal Reserve (Fed) cut its key rate three times, for a cumulative reduction of one percentage point, to a range of 4.25 to 4.50 per cent. Although interest rates remain high relative to recent history, the US economy remained resilient.
GDP growth routinely surprised to the upside and unemployment only ticked up slightly over the course of the year. Rates were also cut in Europe and the UK by 1.0 and 0.5 percentage points respectively. Economic conditions in both regions were gloomier than in the US. This helps explain why, at the time of writing, markets expected the US to cut rates twice, the UK close to three times, and Europe close to five times in 2025.
2. AI boom continues to drive US mega-cap stocks
Optimism around Artificial Intelligence (AI) helped drive exceptional gains in US technology companies’ share prices in 2024. Shares in the Magnificent Seven (the seven largest companies in the US index) gained 67 per cent over the year, helping drive the S&P 500 up by 25 per cent in USD terms. Nvidia registered a 171 per cent gain due to the continued surge in demand for AI processors.
AI optimism encouraged further investment from the US's four biggest internet groups
The optimism around AI encouraged further investment from the four biggest internet groups in the US (Microsoft, Meta, Amazon, and Alphabet). Their capital spending is estimated to have hit $290 billion in 2024 and is expected to grow even further in 2025. A key question for next year is how effectively this investment will be translated into earnings. Regardless, tax cuts and continued robust economic growth should provide a tailwind for US equities over the coming year.
3. The year of the election
Last year saw more elections than any other year on record, with over 70 countries, covering four billion people, going to the polls. This included major economic nations like the US, UK, France, and India. In the UK, the Labour Party was elected after 14 years in opposition. Labour presented its first budget in October, in which it materially increased tax, borrowing, and spending, leading to a sell-off in gilt yields. Crucially, the independent Office for Budget Responsibility (OBR) did not forecast much of a boost to growth following this, increasing UK borrowing forecasts for future years.
The US elected former president Donald Trump for a second term. With the Republican Party also winning Congress, the incoming administration is in a strong position to implement its policy agenda. President-elect Trump’s key policy proposals include tax cuts, deregulation, border controls, and tariffs on imported goods (with a particular focus on China). Although this could have a mixed impact on inflation and growth, Trump’s victory fuelled rallies in stocks and other risk assets, with Tesla gaining 60 per cent since the election and Bitcoin momentarily surging past $100,000.
How did we position MAF Core and MAF Plus portfolios?1
Growth assets
Global equities performed well in 2024, with all key equity markets posting a positive return for investors. This was despite several bouts of volatility, due to fears of potential political upheaval, US recession, and sticky inflation.
The S&P 500 was a stand-out performer, posting a return of over 25 per cent
Markets were supported by global growth, which generally proved resilient, alongside continued rate cutting by central banks. In particular, the S&P 500 was a stand-out performer, posting a return of over 25 per cent. This was primarily driven by the Magnificent Seven stocks, which delivered an exceptional 67 per cent return over the year. Donald Trump’s election victory also provided a boost to the index in the fourth quarter. European equities posted a smaller gain over 2024, due to continued weakness in macro data and uncertainty caused by political shocks in France and Germany.
Against this backdrop, our overweight positions in North American, Japanese and European equities were positive contributors in 2024 (the latter two now closed positions), within MAF Plus - which incorporates tactical asset allocation decisions, in addition to strategic asset allocation.
We maintained our US equity overweight, with changes to other regions. Our overweight equity position has been additive in 2024, especially our exposure to US equities, which we have increased over the year. US tech stocks benefitted from continued revenue growth, driven by the AI boom, optimism surrounding the US ‘soft landing’ and, in the final quarter, the Republican Party’s clean sweep.
We closed our overweight exposure to European and Japanese equities
In the latter half of the year, we closed our overweight exposure to European and Japanese equities. The former was closed due to weak macro prospects. On our Japanese equities position, we decided to take profits following opportunistic trading during August’s market volatility.
We also closed our US / emerging market equity relative value trade after the People’s Bank of China (the Chinese Central Bank) announced a substantial stimulus package in September.
Meanwhile, we held active positions in US healthcare, due to the sector’s promising innovation prospects, and in European banks, which offered protection during market weakness in the third quarter.
Defensive assets
Most fixed income assets delivered positive performance in 2024, though this was less pronounced than in growth assets. Rate cuts took longer than initially expected due to upside inflation surprises earlier in the year.
In the UK, the October budget sparked concerns around higher spending
In January, markets were pricing in approximately six rate cuts by the Fed, but only three were delivered. This saw global bond yields trend higher in the first half of the year. In the second half, developed central banks became more dovish as inflation showed signs of easing. In the UK, despite rate cuts by the Bank of England (BoE), the budget announced in October sparked concerns around higher spending. This affected gilt performance.
In MAF plus, this meant our gilt position detracted from returns in 2024, although our short position in Japanese government bonds helped offset some of this.
We maintained an overall neutral position within fixed income, taking tactical positions within certain regions. We continue to be overweight UK gilts and traded proactively around the October budget. We expect the BoE to continue cutting rates in 2025, potentially more than other developed central banks.
We had overweight positions in German bunds and US Treasuries to provide diversification
Over the year, we also had overweight positions in German bunds and US Treasuries (now both closed positions), to provide diversification within our tactical fixed income positioning.
In terms of underweight positions, we continue to be short Japanese government bonds, although we reduced this position in the second half of 2024. The Bank of Japan is expected to continue hiking into 2025, albeit at a more gradual pace, which supports our thesis.
Alternative assets
Alternative assets also posted positive performance over 2024, delivering on their diversification benefits for our portfolios. In MAF Plus, we entered the year with an overweight gold position within the portfolios, via our synthetic gold holding. This was closed in May to take profit, following a strong rally by the commodity during a period of geopolitical escalation, and added extra value. Both this and our allocation to the Aviva Investors Multi-Strategy Target Return strategy performed strongly.
Market outlook and positioning: What do we believe happens next?
From an active asset allocation perspective, we maintain a long position in equities, with a preference for focused exposure within the US market. We continue to see the current macro environment of resilient growth as favourable for equities, supporting corporate profitability. Regarding global fixed income, the potentially inflationary effects of the policies proposed by the second Trump administration present a risk to central bank easing biases. We believe the UK is the exception. The continued focus there on growth risks is likely to place a ceiling on bond yields.
US companies are expected to benefit from a combination of US corporate tax cuts, deregulation policies and fiscal stimulus
In terms of equity regions, we have a focused overweight position in US equities. In 2025, US companies are expected to benefit from a combination of corporate tax cuts, deregulation policies and fiscal stimulus in the US. The resolution of election uncertainty has also improved investor sentiment. Earnings have continued to be robust too, as shown throughout 2024, helping to stabilise valuations.
Regarding our tactical fixed-income allocation, we are short Japanese government bonds and overweight UK gilts. We believe Japan is still in a hiking cycle given their domestic inflationary pressures paired with concerns around currency depreciation. This is supportive of future rate hikes. In the UK, evidence of slowing activity continues to mount, painting a weaker macroeconomic picture than in other developed economies. That means there is growing potential for the BoE to cut rates more than other developed market central banks. We believe our gilt position could benefit from this.
