While the third quarter was marked by the stock market crash in Japan and its global impact, the re-election of Donald Trump as U.S. president was the focus by year-end.
In the run-up to the U.S. election, some of the trends of the third quarter reversed, with bond markets seeing renewed losses, which in some cases eroded the entire annual return. This is because Trump is generally seen as someone who stands for high national debt and expansive economic policy. Both are considered inflationary and are therefore negative for bonds because rising interest rates lead to falling bond prices.
Chinese equities also saw a trend reversal and lost a large part of their third-quarter gains, as they are considered the big losers of a Trump 2.0 presidency. The same applies to many international stock markets, as companies that rely heavily on U.S. exports will have to adapt to a new American tariff policy.
By contrast, U.S. equities performed very well, as they should continue to benefit from an expansive economic policy. In addition to the reinvigorated ‘Magnificent 7’ (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, Tesla), the shares of small and medium-sized U.S. companies also saw a sharp rise in prices. The same applies to the so-called crypto markets, which many market participants believe will benefit from a Trump presidency.
Even though global financial markets were a bit weaker in December, we can say that 2024 will go down in history as one of the best years for American as well as broadly diversified global equity investors.
The infamous ‘Magnificent 7’ and other stocks associated with ‘artificial intelligence’ have dominated both American and international equity indices. Those who are significantly invested in this trend and corresponding stocks will hardly believe their luck, as returns of well over 20% p.a. were achieved, which is roughly three to four times the regular return of a diversified equity investment.
Global strategies that were less invested in the Magnificent 7 (‘value strategies’, dividend strategies, small-cap stocks, etc.) also had a very good year and achieved quite a bit more than the usual equity returns of between 7-9% p.a.
In terms of individual equity sectors, the technology sector in particular, but also the biotechnology sector, performed very well. Those who did not follow the above trends and sectors will have realized that some stock markets even had a very poor year, specifically France, which saw equities losing money in 2024. This shows why we highly recommended the construction of globally diversified equity portfolios!
As for regional stock markets, the American market was far ahead, even if one does not only look at the technology-heavy indices (S&P 500; Nasdaq 100).
In contrast to previous years, Asian and Emerging Market indices also performed very well in 2024.
Europe, except for the DAX 40, had a very disappointing year. The French stock market, like the stocks of many small European companies (e.g., MDAX), posted losses. This is very annoying for investors in these markets, given the boom in global technology stocks and broadly diversified indices.
As for the global money and short-duration bond market, both have seen very encouraging returns without any drawdowns. Fortunately, the days of zero or negative interest rates are over, so that cautious investors are finally being rewarded for saving again.
Bonds from smaller segments such as High-Yield, Emerging Market, and Tier 1 Capital were even able to post mid to high single-digit returns. Asian- and EM High-Yield markets saw double-digit gains.
Investment Grade (IG) bonds with short maturities showed positive returns but didn’t have a particularly good year. Intermediate and long-dated IG bonds unfortunately ended the year in negative territory, as capital market rates rose towards the end of the year. Long-dated bonds had to record double-digit losses. Private Credit investments saw a decent performance, like global HY bonds.
Commodity investments also had a very good year, with gold standing out with very high double-digit returns!
As for the comparison between index-based and actively managed strategies, all active bond strategies beat their benchmarks. Active equity managers who had exposure to Asia and Emerging Markets also beat their benchmarks. As for global strategies, it depends on whether the managers had significant exposure to the ‘Magnificent 7’. Luckily, a large proportion of our preferred active strategies were able to beat corresponding benchmark ETFs or index funds.
As for the four best-known factor indices (momentum, size, value, and quality), based on the performance of the MSCI index family, the so-called quality and momentum factors outperformed their benchmark, the MSCI World Index. The factors ‘size’ (company size) and ‘value’ (low book value) underperformed it.
The so-called MSCI World Multi-Factor Index, which weights the four factors equally, performed almost in line with the MSCI World Index.
Dividend strategies also had a good quarter but could not quite keep pace with the broader market.
After a rather weak third quarter, the U.S. dollar was able to make up for lost ground amid Trump 2.0 enthusiasm and had a very strong year overall against most world currencies.
