Q4 2024
2024 was a strong year for equities with developed markets returning 21% (MSCI World GBP) and Emerging Markets returning 10% (MSCI Emerging Markets). Markets were powered by a belief in AI and corporate American (which is now 73% of the global index) and the ‘Magnificent 7’ (which are now over 20% of the global market) led markets to new heights. These companies are a diverse bucket, from Microsoft to Tesla and for the better quality ones share prices have not run ahead of valuations as earnings have continued to impress. These companies have flourished against a backdrop of anxiety and distrust, higher inflation and higher interest rates. 2024 was a record year for elections and populist governments stole a march almost everywhere, including most notably in the US with Trump returning to power. It was a year of conflict as the conflict in Ukraine ground on and tensions flared up in the Middle East once again. Protectionism and isolationism, two sides of the same coin are on the rise and companies have re-aligned their supply chains as politicians are using trade tariffs for political gain. Chinese equities had a false dawn in Q3 following a stimulus programme but investors reflected that it was not sufficient to deal with the fundamental credit issues facing the country. India, which has roared ahead of China in recent years, had a pull back after some companies faced governance issues that came under scrutiny in the US.
In many ways its been a terrible year for ESG as it has been drawn into the culture wars in the US and characterised as ‘woke capitalism’. Climate risk has become a flash point of division from red to blue states in the US with most pension fund boards accepting climate risk but state treasurers in red states have bought in a raft of anti-ESG legislation. Government defined benefit plans in the US hold $8.7 trillion in assets and could go some way to helping global efforts to meet net zero. To varying degrees State Street, JP Morgan and Black Rock pulled out of ClimateAction 100+ as they felt that disclosing investment choices threatened their fiduciary responsibilities to investors. Larry Fink, for years a proponent of ESG, appeared to row back from his commitment in his annual letter to shareholders talking about ‘energy pragmatism’ and saying the term ESG had been misused by left and right. Later in the year, Amazon and Meta, amongst other companies, ditched their diversity and inclusion programmes and scrabbled to elevate Trump allies to significant positions e.g. Joel Kaplan will be the chief global affairs officer at Meta. In the UK challenges around the FCA’s Sustainability Disclosure Requirements and in particular the need for evidence, led to a slow and difficult rate of adoption and prominent managers like Stewart Investors declining to participate further. Against this backdrop, the ESG market is maturing and it remains resilient in Europe with $18 trillion in assets (out of $30 trillion ESG assets globally) and is projected to reach around 25% of $140 trillion of total assets by 2030.
2024 will go down as the year that passive funds surpassed active but it’s also the start of AI being incorporated into investment strategies, something that will further accelerate the efficiency of of markets but also the potential for volatility especially if these trading strategies all react in the same way (as explored by the IMF”s latest Financial Stability Report). Market concentration is at its highest with the top 10 stocks accounting for a third of the S&P and Nvidia responsible for 5% of the S&P 500’s returns in 2024 and achieving a bigger weighting in the MSCI World Index than France. There is an ongoing listing crisis, with fewer companies choosing to list in the US (and it’s even worse in the UK), restricting opportunities for public investors.
The whole world is betting on the US, confident that Trump will cut taxes and favour deregulation. Markets are trading on a PE ratio of 22x with the US IT sector trading on 29x; valuations are expensive but equally companies have strong cash flows and expected earnings growth of 12%. From a global perspective Europe will be hit by concerns over tariffs, issues in China remain and Trump is notoriously unpredictable. Investors have unbridled faith in corporate America and are paying little heed to the macro environment, either the rules of the game have changed or 2025 might prove to be a volatile year. The goldilocks scenario and one that would benefit managers, is that share price gains broaden out from the tech stock as more stable growth stories are rewarded but there remains a risk that, unless profits can be demonstrated from AI applications, these tech companies will stutter and being highly correlated, drag the market down with them.