However, this is not a global economy firing on all cylinders - far from it. Further rate cuts seem justified and are expected to come in 2025, albeit at a slower pace in the US than we saw last year. We end 2024 with the UK and European economies still very subdued, and with global manufacturing still facing headwinds. The positive outlook for global growth rests on the continued strong performance of Services in the US, supported by strong growth in India and recovery in China. And although inflation has trended clearly lower over the course of the year, the journey has not been smooth, and upticks in the US and UK in the latter months of 2024 present a challenge for policymakers, potentially making it harder to cut interest rates to support growth.

The year was punctuated by a series of brief corrections - an inflation scare in the spring, a growth scare in the summer, and a weak run-in to the year end in December, as investors took profits after a post-election market surge, and digested a likely slowing in Fed rate cuts in 2025. But for the year as a whole, the combination of falling interest rates, moderating inflation and resilient US (and therefore global) growth drove excellent equity returns. Global stocks rose 22% in 2024, led again by US equities gaining 28% (and US growth stocks in particular up 39%). European stocks made gains, but far behind the stellar performance of the US and almost all delivered in the first half of the year, with a waning performance in the second half - even as the US powered on: European stocks gained 9%, and UK 11%, which might normally be regarded as an attractive return - it’s only in the relative context of outsized gains for US technology stocks that investors might feel disappointed. It’s worth noting that despite the weak performance of core European economies, headline equity indices in the UK, German, France and Netherlands all recorded new all-time highs at some point in the year. Emerging market equities also made gains, returning 10% for the year, helped by a late surge in China. Japanese equities also made strong gains, up 20% in local currency terms: sadly, for global investors holding Japanese equities, the weakness of the Yen detracted from these apparent strong gains.

It has again been a story of narrow leadership by technology stocks, driven by optimism about Artificial Intelligence. Growth outperformed Value by an enormous margin, both globally, and in the US. Technology-related sectors led the way to the upside, with the global IT sector gaining 40%, Communications Services 37% (driven by the large social media and search companies) and Consumer Discretionary 26% (boosted by world’s largest online retailers and electric vehicle companies). But Financials performed well too, gaining 29%, helped by a steepening yield curve amid steady economic growth. At the other end of the performance spectrum, all major sectors globally made gains, with the exception of global Materials stocks - dominated by mining conglomerates and industrial gases groups - which made modest losses. Gains by global Healthcare and Energy stocks were minimal.

Currencies muddy the picture a little for equity investors, who are typically unhedged in their stock exposures, but may well have currency hedges in place for overseas bonds. The Euro weakened to $1.03 vs the US Dollar - other than a few months in late 2022, this is the weakest level for the Euro seen in over 20 years, as pessimism about the Eurozone economic outlook and political uncertainty in France and Germany plumbed new depths. Contrarians will be looking at scope for opportunities if the situation in Europe shows any sign of improvement. Sterling gained strongly in the first nine months of the year, but gave back all the gains and more in the final quarter, ultimately slipping to $1.25 by year end, as earlier optimism about prospects for growth under the new government faded. Having been a headwind to performance for overseas investments until September, the Pound’s year-end weakness means that Sterling-based investors with overseas holdings saw a significant boost to performance from currency movements in the final quarter. As for the Japanese Yen, despite a brief and market-shaking surge in the summer, the ongoing trend of weakness resumed: the Yen lost 8% against the Dollar over the year, its fourth consecutive year of losses.

It may not have been the case for each quarter, but taking the year as a whole, investors yet again had to own US equities and the US Dollar to capture the best returns. It’s no surprise to see questions emerge over how much longer this narrow US-led outperformance can continue: momentum is strong, but valuations stand at levels that suggest long-term returns from here for US equities could be on the disappointing side. Holding well-diversified portfolios, with exposure to cheaper and currently less-favoured asset classes (bonds as well as non-US stocks), alongside more richly-valued assets with strong current momentum, gives investors potential shelter when the winds change.

Bond markets had largely priced in the rate cutting cycle during 2023, reflected in strong gains for government bonds that year; 2024 proved harder. Although bonds performed a helpful role in portfolio diversification, rallying when stocks corrected on growth concerns, the likelihood of slower interest rate cuts in 2025 and growing concerns over the trajectory of public sector deficits meant minimal returns from both global government bonds and investment grade (high quality) corporate bonds- around 3% - as yields pushed higher in the final quarter of the year: the US 10 year Treasury yield ended the year at 4.6%, close to its highest for the year. Ten-year Gilts, which started the year yielding 3.5%, ended 2024 with yields also close to 4.6%, delivering a -3% return. At current levels, UK government borrowing costs are at their highest since the global financial crisis, posing a challenge for the new government’s spending plans. If yields rise further, to 5% or beyond, the pressure on governments to demonstrate that they have a handle on public finances will intensify - but if governments are able to show credibility, we may yet see investor appetite for bonds returning: mid-single digit yields from fixed interest could provide a realistic alternative to uncertain returns from richly valued equities.

While government bonds suffered in the latter part of the year, as markets looked again at inflation risks and a slowing path of rate cuts, riskier bonds generally performed well. Sub-investment grade (“junk”) bonds led the way, helped by high yields and a further narrowing of credit spreads, with a return of around 9% for the year. At current levels, credit spreads are close to record lows: investors receive minimal compensation for lending to the riskiest borrowers. As long as recession is avoided, this may not be problematic, but prudent investors will be considering the risks of spreads widening - hitting returns from high yield - in a future slowdown. It was a similar picture for Dollar-denominated Emerging Market bonds, which returned around 8%; local currency Emerging Market bonds returned around zero, as currency losses offset the high underlying income yield.

Treasury Inflation-Protected Securities (TIPS) slightly outperformed conventional Treasury bonds in the US, but Linkers lagged Gilts in the UK: although inflation protection has appeal in a world where inflation risks have not gone away, Linkers on average have significantly longer duration than conventional Gilts, making them more sensitive to changes in yields and rate expectations. Currently UK Linkers offer a real (adjusted for RPI inflation) yield of 1.3%. This may appeal to investors concerned about ongoing inflation risk.

Turning to the range of alternative assets available to investors, hedge fund returns were generally well below equities (albeit with less volatility), listed property securities made money in the US but typically fared less well in the UK, and listed infrastructure funds generally made negative returns, with asset pricing undermined by higher bond yields. Diversified commodity indices made modest gains, with oil prices closing the year close to where they started 2024, but the standout performers were precious metals: Gold traded to new record highs in October and closed the year above $2600/oz, a gain of 27% in 2024. Gold sometimes takes support from rising inflation or from falling real yields: neither was evident this year, with inflation generally moderating. Some commentators suggest that market unease over growing public debt is the key factor in supporting both gold and a resurgence in cryptocurrencies, with Bitcoin surging past $100,000 in mid-December.

2024 saw elections in over 40 countries - mostly bringing bad news for incumbents. Leaders who had been in power during the post-Covid inflation surge were mostly punished by electorates for the rise in cost of living: perhaps unfairly. This was not a global swing to right or left, or even necessarily towards populists, so much as a backlash by voters against all incumbents of whatever political complexion. Incumbents lost most notably in the United States and United Kingdom, but other democracies saw significant votes against incumbent leaders, including setbacks for long-standing governing parties in Japan and South Africa, and parliamentary losses for incumbents in South Korea, France, India and elsewhere. For investors, the incoming Trump administration is a key factor for the outlook in 2025. The strong performance of equity markets in the wake of the November election win suggests that investors are unconvinced that the tariffs and protectionist trade measures Trump ran on will be fully implemented: if they are, markets will likely need to recalibrate rapidly to price in a stagflationary shock, reflecting supply chain disruption and a step up in inflation for US consumers. The impact of the incoming administration on conflicts and tensions in the Middle East, Ukraine and elsewhere remains a key unknown, with scope to meaningfully shift investors’ perceptions of risk.

The trajectory of central bank policy will be a key driver for markets in 2025, dependent as ever on the path of inflation and growth. Labour markets in the US and UK have weakened a little through 2024, and still-high mortgage rates present a headwind. Consumer confidence indicators in the UK are well above levels of a year ago, but consumer spending is muted and employers are signalling caution over pending rises in National Insurance. As long as inflation resumes its broad downward trajectory, market expectations of around another four interest rate cuts in the UK this year seem fair. The US consumer is performing more strongly, helping keep US growth at robust levels and proving yet again the engine of global growth. Moderating inflation should permit some further easing by the Federal Reserve, but markets are adjusting to price in fewer rate cuts, with longer gaps between them. But looking back at 2024, where market expectations oscillated between expecting as many as 8 cuts in the year at one point, to pricing in no cuts - possibly even a rate hike - amid the springtime inflation scare, we should be ready again for volatility in rate expectations, and of course for broader market volatility, as the prospects for growth and inflation are continually reassessed.

Markets appear confident that recession can be avoided in 2025, but a little less sure that inflation will keep tracking lower. Questions remain over how far can expensively-valued US tech stocks maintain their momentum, or whether much cheaper European and Asian stocks can have a moment of outperformance; or indeed whether public sector finances will stabilise and government bonds start to gain in appeal as yields approach 5%. It would have been damaging to turn too cautious too soon on highly-favoured and expensive US growth stocks, but a well-diversified portfolio designed for robust long-term performance will ensure that investors have exposure to a range of less-favoured, cheaper assets alongside popular past winners.

N.b. All content is based on data at the time of writing on 7th January 2025.