For global investors, 2024 sure turned out to be a 'Year of Answers'
So much so, even a bout of new geopolitical uncertainties failed to spook markets
At the time of writing, it will only be a matter of weeks before financial markets go in hibernation for the end of the year.
So far, gold’s gained +30%, followed by stocks by +20% in developed markets and +10% in emerging one. Out of the 10 major asset classes that are part of our process, only government bonds are down, by a mere -1.5% for a dollar-denominated global index, which is not much especially as the dollar is up almost 5% against trade -weighted counterparts.
2024 should thus be another very good vantage for investments, barring an unexpected disruptive big event in the meantime.
Well, I am not even sure that an ‘unexpected disruptive big event’ would have a large impact, which is one of the defining traits of what we had called the ‘Year of Answers’.
In the last few weeks alone, we have seen:
- A total Republican victory in US elections, taking all positions of power, with a clearly disruptive America First platform.
- In Europe, the German ruling coalition imploded, France’s government was censored, and the result of elections in Romania were such a surprise that the country’s top court cancelled them, raising many questions.
- Not far from there, the conflict in central Europe is escalating, with sinister implied threats from the nature of the missiles used on both Ukrainian and Russian territory.
- In the Middle East, combat zones are expanding, most recently to Syria after the leadership collapsed, another major event.
- Moving further East, China is prepared to respond to US pressure, including a probably very significant stimulus plan – but President-elect Trump just announced he will invite President Xi to his inauguration.
- Japan’s LDP party lost majority in the lower house for the first time since 2009, while in South Korea, martial law was briefly declared, followed by an impeachment vote.
In short, the entire planet is covered with unexpected disruptive big events, with an acceleration in the critical period between the current and the next US administration.
Did market convulse in terror? The short answer is 'No'.
They were volatile, especially in emerging markets, but neither oil nor gold prices skyrocketed, global stocks continued to rise, there was no flight to quality inundating the government bonds markets, and the performance of a diversified portfolio is pretty much at its highest of the year – at double-digits for our own moderate allocation as we write.
Markets even surprised us.
After the vote that censored the French government over budget disagreements (France combines high debt and high deficits), the spread between French and German government bonds narrowed, while intuition would have predicted the opposite.
Similarly, the market reaction to the confirmation, from the US CPI report, that disinflation has stalled was to cement the anticipation of a Fed cut in December next week. Gold outperforming all other asset classes despite a strengthening dollar and rising long-term yields is probably the only clue that geopolitics had a partial impact.
Should we conclude that events don’t matter for your portfolios? Are financial markets disconnected from history?
Of course, they aren’t.
But markets in 2024 were all about getting answers to a couple of big top-down questions and the favorable scenario that took place - on growth, inflation and central banks - dominated everything else.
Now as we work on our 2025 outlook, the backdrop is different. There are winds of change. The world will see new leaders, new policies, new balances of powers that will affect everything from trade to currencies and supply chains.
By contrast to the ‘Year of Answers’, there is a strong consensus with regards to the top-down scenario, from US exceptionalism and India’s rapid growth to central banks easing policies in a differentiated way according to their own regional backdrop.
The important point is that valuations undoubtedly reflect this consensus. Visibility is expensive: from US and India as regions, to the dollar as a currency, or AI as a sector, what is strong is expensive.
There is no obvious anomaly to exploit, which means that any surprise may have a much larger impact on markets than in 2024.
A lower risk 2025?
Should we start 2025 in low-risk mode? Not necessarily. Events will matter, but they are unpredictable, and the current backdrop is not actually adverse.
The global economy is healthy, apart maybe in Europe, and while valuations are rich, investors’ sentiment is not outrageously bullish. We may not have strong convictions to start the year, which means that we may be fully invested, in line with our strategic allocations, and get ready to react rather than anticipate.
We believe that the potential for surprises, as well as the nuanced evolution of globalization, are reasons to increase regional diversification.
Another certainty is that the UAE is ideally placed to navigate the winds of change of 2025 and beyond: as a country, as an economy, and as a financial center, an ideal place to protect and grow your capital.
We wish you a great end to 2024.