Podcast - 2024: Year-in-Review

Welcome to Beyond the Benchmark, the EFG podcast with Moz Afzal.

 

Moz Afzal:

Hi everyone. Believe it or not, this is episode 109, so a very important one and of course the last one of 2024. So with me today to navigate a review of 2024 and what happened to the economy, markets and politics, I have Daniel Murray, who's the Deputy Chief Investment Officer for EFG. So Daniel, welcome.

 

Daniel Murray:

Thanks Moz. It's always good to be on.

 

Moz Afzal:

So this podcast we have called Year in Review, so we'll review 2024 and give you a little bit of a window of our outlook of 2025. For those of you interested, our 2025 outlook is actually on the EFG international website, so please do go there to take a look and we'll be travelling around the world in the new year and going through our outlook of 2025. So we hope to see you there in person, indeed, if you can make it. So the year in review, I guess we start with what the markets have done. So in 2024 as we speak, and this is the 12th of December, and global equities have returned something like 23%, much, much more stronger than many people expected and that was driven by the S&P 500, which was up around 27% or so for the year to date.

 

And that was very much driven by the technology stocks and Mag seven in the first half of the year, and the broader market rally as we went through the course of the rest of the year, probably European equity is a little bit disappointing up around 10% or so and UK and Swiss equity is actually a bit below that. China and Hong Kong in particular did very well up around 18% and HSA up 25%. So really strong returns. That definitely was not the case at the beginning of the year and probably in Asia, Taiwan, again, no surprises how strong that is given the art of issue intelligence moves. Korea, disappointing certainly more recently due to the political situation there and certainly more difficult environment for markets certainly in the last six months or so in Korea in particular.

 

And that, in contrast what many people in Korea were expecting, that there would be a, similarly RBA type policies, that were so successful in Japan would be replicating Korea that didn’t really come to pass. Probably the most disappointing stock markets in the world were Latin American equities down due to worries around the political situation, and not being able to get a lot of the reforms through that were expected and a more latterly, and Mexico as Trump came to power or will come to power. Mexico is certainly in the cross hairs of the Trump administration. And then moving that onto fixed income markets, I would say disappointing, particularly if you are in the long end of the curve. Ten year bonds in generally didn't do that well. US only up around 2% or two and a half percent for treasuries. But clearly if you're in the shorter part of the curve, returns were much, much better and corporate bonds in particular did much better as well.

 

So spreads tightened high yield in dollars was up around 9.2%. Convertibles, which is one of our top picks for 2024, up over 10%, so around 10.5%. This is a US convert. And then moving on to Europe. Actually European governments bonds did reasonably well both in Swiss francs and in euros. As interest rates came down far more than expected, certainly far more than expected in the beginning of the year and then moving on to the dollar, dollar was a lot stronger. Certainly against our views we felt there would be mild dollar weakness and we were very right up until the 1st of September. And where they were all positive and when Trump came in, that flip round to a dollar rally of around 5% or so. In fact just over 5% as his policies were seen as very pro-growth and interest rate expectations both between Europe, Japan, UK and Switzerland in particular changed.

 

And then finally on commodities, gold continue to perform very well as investors fretted about government deficits and the outlook for fiat currencies. In fact, gold and cryptocurrencies did very well on the basis against the dollar where everything else depreciated against the dollar. So maybe gold and crypto were the best bet in a difficult patch, although certainly on cryptos is very correlated to stock markets and risk assets wouldn't read too much into that. And then finally, industrial metals and commodities were up marginally for the year between 5% or so, and that's probably disappointing given economic growth has been very strong and we've had rate cuts at the latter half the year. So that gives you a roundup of 2024. So really decent market returns, some big surprises there as well, and maybe just throw it to Daniel in terms of those markets relative to the beginning of the year, what were the key features? I mean one thing we noted was that expectations were from negative S&P 500 in 2024 and obviously all of those strategists were completely wrong.

 

Daniel Murray:

Yeah, I mean there's this phrase about markets climbing a wall of worry, and I think that was absolutely true in 2024, we had a strong rebound in 2023. I think if you turn to analyst expectations at the beginning of the year there was lots of bearishness and we've only really seen analysts turn a bit more bullish in the second half of the year. And then once they turn a bit more bullish, it then takes a little bit more time for positions to switch around. So I think it's been a classic case of this wall of worry being climbed and in contrast with analyst expectations. So I think you need to be careful about what you read and what you believe. So yeah, super interesting in that context.

 

Moz Afzal:

Yeah, I mean we were quite astonished at how negative Wall Street was at the beginning of the year and we were, I would say we were probably the more bullish ones. We actually had quite overweight equities at the beginning of the year and rode with it over the course of the year. But we were very surprised at how negative and bearish investors were with the outlook of four equities in 24 at the end of 2023. I would say expectations now are probably a little bit more realistic now people are looking somewhere between 5 and 10% for the US equity market, but still note a lot of bearishness around Europe, a lot of bearishness around Asia and China. So it'd be very interesting to see there's a bit of a catch up trade in the offering.

 

Daniel Murray:

I think there's a lot of bad news already priced into those markets and so there's a lot of optionality because I think there's quite an asymmetric risk return profile related to those markets that have already been beaten up. So it doesn't mean that things can't get worse, of course things always can, but the downside versus the upside looks, the upside to downside balance looks relatively favourable I think just because these markets are so beaten up already.

 

Moz Afzal:

So as we go into 2025, one of the analytics that we use, looking at Google search trends, to get an idea of what's on investors' minds from a macro environment perspective, and then obviously from a thematic perspective. Maybe just talk a little bit about the macro perspective and what's on people's minds, Daniel, at the moment.

 

Daniel Murray:

Yeah, so I think at one stage all that people wanted to talk about was inflation and rates. And it's interesting that a lot of people are now not talking so much about inflation and rates. There's lots of talk about Trump, lots of talk about the potential impact on the deficit and increasingly as well, lots of talk about the BRICs and how they evolve in a world of potentially deglobalization and the much talked about Trump tariffs. So there's been some, I think pretty meaningful shifts over the past couple of years. And I was recently in the US and I think that shift in terms of the point of focus of the conversation was very much prevalent and very clear to me. Whereas even just a year ago the focus was on the fed and inflation trends, it's shifted pretty definitively away from that.

 

Moz Afzal:

We'll talk about the outlook for interest rates in a second, and one of our themes for 2025 is the BRICs itself, and we just noticed again a significant blip up in searches on BRICs. So it seems to be making certain people's minds some headway. And my kind of geopolitical lens to this is that with the Trump narrative being very much about make America great again and the MAGA movement, that means we're not bothered about anywhere else in the world. It is about focus on the US. And the sense I have is that if indeed Trump goes aggressive on these tariffs and the US becomes more I guess isolationist in terms of where we just focus on the US, we don't really care about anywhere else. And I just wonder whether the BRICs possibly starting to talk about creating their own little currency block and their own little trade block and be able to, I guess, do trade freely as a collective.

 

And then you've got, if you like US on one side and one extreme, very much focus on their own internal economy, then you have Europe is somewhere in the middle and on the far right then you have BRICs more and more focused on doing business with themselves. BRICs is now no longer just the four countries, it's actually nine countries with Saudi and Turkey also looking to join that block. And you just can't help thinking that the world will break up into three, and Europe needs to make up its mind whether it wants to be with the US or whether it wants to be with these new emerging nations that actually they can export a lot too.

 

Daniel Murray:

Yeah, I think that's right. I think I'm certainly guilty of thinking in a very US-centric way and that's understandable because US economy is the largest and most important in the world and the US markets are the largest and most important markets in the world, whether fixed income, private markets, equities, whatever it might be. So I think it's natural for us to think from a US perspective, but actually we forget that most of the world's population resides in BRIC countries, and a side effect of Trump's foreign policies and his tariffs is that you're just encouraging those nations to seek to trade more freely with each other. And historically that's been difficult because politically haven't been so well aligned and obviously economically they're less well developed and their systems aren't so well entangled with each other. But I think that what Trump's doing is just encouraging these countries to get closer to each other. And I think for Europe the way they jump will just depend on the extent to which Trump includes them and his tariffs. So if he goes a bit easier on Europe and if the NATO alliance holds and European nations increase their defence spending, then that would obviously see the EU being incentivized to align more closely with the US and the tougher that Trump is and on the EU in terms of tariffs and in terms of their NATO commitments. And I think the more that encourages the EU to seek alliances with the BRICs,

 

Moz Afzal:

You can't help thinking this is quite a seminal moment, isn't it, in terms of policy as we go into 2025, whether we start seeing some of these fishes, I'm once they call 'em cracks at the moment, they're probably just small little fishes starting to appear that they can eventually lead to cracks and everyone kind of floats away in their different worlds. And I think that's certainly going to be super interesting. I think certainly something that we are going to be spending a lot more time on thinking about in 2025. And then the other area that investors are focused on is very much on the thematic side and here artificial intelligence remains very, very, very, very important in terms of the way that investors think about artificial intelligence and its impact on companies and profitability and all those very good things. And just note in our podcast in fact Beyond the Benchmark podcast, I'll just refer you to episodes 95 and 98 around AI topics specifically.

 

And the first is around the battlegrounds of AI with Jonathan Rawicz and Henry Walters who took us through that battleground, I think is well worth listening to that podcast if you've missed it or haven't really, or revisit it, it's definitely worth doing. And then we talked about AI regulation at the Gamma Foundation Summit, which was episode 98. So play for those of you who are still interested very much in the AI topic, it's well covered in this podcast. And then more latterly, we also cover the topic through Nathan Furr, who's our future leaders network guru, and professor of innovation at Insead. He had a podcast series, with two out of three on that podcast series about the six laws of technology. So again, urge you episode 104 and 107 that to refer to that as well. So plenty of good topics to talk about with respect to the AI topic and well covered in our podcast. So moving then on to one of the dominant themes in 2024 and obviously Daniel's about financials, it was about tech and the concentration, again stats that I still fret about a little bit is that out of the last six years including 2024, the top 10 stocks contributed to more than 30 or even 50% of the total returns are out of major indices again. Is it going to be 6 out of 7 for 2025?

 

Daniel Murray:

It's really hard to know. Clearly it's a question that's on everybody's mind and the way to think about it is that it's very hard to time these things, but you know that it can't continue forever. And so I think from a risk management and portfolio construction perspective, it just makes sense to think about broadening out trades and obviously part of the market that has underperformed over the past few years and I think looked ripe in a world of interest rate cuts and a greater focus on domestic activities, smaller midcaps and obviously that's one of our themes for 2025. So I think that whole market broadening makes a lot of sense. It's not a forecast on whether or not you see concentrated returns persist or not. It's just a reflection of I think of sensible risk management and portfolio management.

 

Moz Afzal:

Exactly. And I think one stat that we are certainly using in our 2025 outlook is in the top 10 for the S&P at least are as concentrated as been since the 1960s. So very high concentration and at that time believe it or not, AT&T was the number one stock with a 10% weight in the S&P 500 at that time. And of course we know what happened next. So certainly from a long-term investor's perspective, these are sort of questions you should be challenging. I mean the good news is in some respects is that given those concentrations, they actually stay concentrated for quite long time before they fell off their perch and their cliff. So in that sixties period. So please if you want to look at that chart, please refer to the 25 outlook. We've got a great chart in there to discuss it.

 

So concentration our view is now good idea to be less concentrated as the timing is always difficult. I don't think it means that these companies will collapse, it just means that other parts of the markets will continue to outperform. And when we talk about our earnings outlook a little bit later on, that's a theme that certainly comes through that point. So then moving on in our 24 review, we obviously had a huge amount of elections. Again, certainly unprecedented and of course we had a US election that had a lot of hype, but it met the hype and I think that's always given what happened with two assassination attempts on Trump, Biden pulling out last minute and Kamala Harris really not being able to give, she wasn't really given much of a chance and of course a very easy win for Trump. All of those things were very hard to predict four months ago. Any other observations from the US election or other elections this year, Daniel?

 

Daniel Murray:

Just on the US election, I think it's the easiest election I've seen in terms in my 30 year career just because regardless of what one thinks of Mr. Trump and his policies, it was just a very, very clean outcome. So the Republicans won the house, they won the Senate, they won the White House, they won the popular vote and they won all seven swing states. There's just no disputes about the result. And that means that in contrast with both 2016 and 2020, it's going to be a very, very smooth transition of power and now markets can just start to price what they think is coming down the pipe. So I think it's been super easy from that perspective and actions start contrast with what's happened in countries like France and obviously there was this unexpected election called in France that didn't have to be called and the outcome is now turmoil.

 

And I think it is somewhat ironic that we are seeing much of Europe go through perhaps to a less extreme extent that a micro experience of what's happening in France in terms of politics shifting more to the right and becoming less certain. And actually in the UK it's been the other way around. We had elections in the uk, we saw a change of government, but we're seeing a shift in politics more towards the centre, towards centre left and we've seen what's emerged and as a very stable government with a very large majority. So I think it's just really interesting and perhaps the biggest irony is that just as much of the rest of Europe is becoming more anti EU, the UK is adopting a more pro EU policy stance, which I think is kind of interesting to note.

 

Moz Afzal:

So I think my observations of the world elections that we've had, obviously there's few surprise ones like France and even Japan, and there's been that very much the incumbents lost. So it's been complete change in government, be it the US, be it the UK, obviously France, Mexico, US, and even in countries where there was strong majorities like India or even South Africa, they actually lost their majorities and had to go to coalitions. So I think probably one very simple thought around the elections in 2024 were all change. I think that's probably the big theme and it's going to be very interesting to see whether all change, mean change. So I think that's something that we are going to be watching out for very, very carefully. Certainly probably in terms of change, the most obvious one has been Trump. So straight away he's set up the Doge with Elon Musk and Vivek Ramaswam,  and we'll see whether they're able to give the $2 trillion they've said they'll save. And then you've got RFK, and probably the most smartest appointment I think in the Trump administration so far has been Scott Bessent. Very interesting to see that as soon as he joined the US Treasury bond market rallied pretty much on point the day he was announced and I think he was viewed as a very, very credible candidate. Any other surprises for you, Daniel, in terms of the Trump administration?

 

Daniel Murray:

Not so far. I mean it is tricky because we don't know exactly what his policies are going to be, so we're kind of trying to second guess from what little he said during the election process. I think Bessent's appointment is interesting because markets had feared that they're being more extreme individual in that role, and so there was just a great sense of relief. It remains to be seen how effective he is and what he gets done. But I think at the moment markets can relax a little bit over that. RFK has a reputation for being a little bit eccentric and holding some interesting views. So that could throw up a few shocks. And of course one of Trump's key policies is tariffs. And we just at the moment, other than the fact he's going to do it, we just have very little insight into what he's going to do. We don't know which countries, we dunno the size or scale, we dunno how countries are going to respond and retaliate. So that does create a lot of uncertainty and one suspects that on balance he's probably using the threat of tariffs as a bargaining tool and he wants to renegotiate the trading relationship with these countries and he probably won't implement tariffs at the extreme end of what he’s threatening. But we just don't know, so we'll have to wait and see.

 

Moz Afzal:

No, exactly. And I think the other obvious one is of extension of the tax cuts that came from Trump 1.0 and of course corporate tax cuts, which according to some commentators will lead to something like a 5% increase in earnings for the US. And you can see where the momentum is kind of brewing there. The other thing that this concept of radical transparency that is going to be focused with respect to US government budgets and deficits and how to alleviate the pressure. The one thing that I'm very interested to see whether other countries use as a bit of a template to try and force change in their own governments. And I think that to me is quite interesting. And if you think about Trump 1.0 was all about the China rhetoric. The question then is, which then everyone else started to replicate, whether this is one of those things that people start to think, oh, we think that's a good idea, this may be something we also need to do. And there's all these kind of stories of a hundred dollars toilet paper that government departments typically buy for. Where does that indeed go and the scrutiny that that brings is going to be really, really interesting.

 

Daniel Murray:

Yeah, no, I agree. I think the US already has one of the most transparent budgetary processes out of developed nations. Obviously they had the congressional budget office that produces independent numbers and I think that's good, but of course transparency and simplicity are two different things and the fact it's transparent doesn't mean that it's simple. So I think a part of role of the Department of Government efficiencies, it's not just going to be about bringing down the deficit and spending less, it's also just going to be about simplifying the process and by simplifying it clearly that will just make it easier to understand. So I think that's a big part of transparency. It's not just about being open, but it's about making it more understandable. And clearly the UK has its office for budget responsibility, but with deficits rising in almost uncontrollable fashion in some parts of the EU. Clearly it's going to be growing pressure. So I think other countries will watch closely what happens in the US to see how successful it is. And if it's successful then I'm sure we'll see other countries copy.

 

Moz Afzal:

No, this is certainly a very interesting discussion. So let's move on to interest rates and central bank policy. Market is currently pricing in a trough rate in the United States somewhere between 3.5% and 3.75%, which doesn't seem unreasonable. But probably the big change over the last few months has been the fact the Eurozone and, as we heard from the ECB today, another 50 basis points of rate cuts, probably a slight surprise there, how rate expectations have changed in the last month or so.

 

Daniel Murray:

Yeah, I think it's useful to cast your mind back to the beginning of the year and markets were reasonably hawkish at the beginning of the year and there's quite a high degree of alignment between the US and Europe. And then the second half of the year we've seen this wedge open up and so expectations around the US have remained relatively hawkish whilst those around the EU have become a bit more dovish. And I think that's reasonable, just looking at the prospects for inflation and growth in both those countries. I think it looks to me that now US expectations are probably reasonable that we're expecting three rate cuts to the end of next year possibly they might need to do four or five obviously depends on the evolution of growth in inflation next year and the EU is at about six rate cuts to the end of next year, which also looks reasonable I think given where we are on the cycle. But of course we know from this year that the rates expectations can be hugely volatile and they're going to be very sensitive to incoming data.

 

Moz Afzal:

I have to say, I don't ever recall it being this volatile in terms of rare expectations or maybe because we're just here and now we feel it's more volatile than it actually really is or has been in line with history.

 

Daniel Murray:

Yeah, it could be it just be that because we're experiencing it.

 

Moz Afzal:

Yeah, exactly. Yeah,

 

Daniel Murray:

We're a bit more sensitive to it, but I think you're right. I think it, it's unusual certainly in the experience of the past 30 or 40 years. It's unusual to see such a wide disparity between the US and Europe. Usually they're pretty well aligned and if anything they've become more cyclically aligned over the past few decades. So that's a big departure from recent experience.

 

Moz Afzal:

So thinking about 2025 now in terms of economic growth and expectations, where do we sit, Daniel? On the growth side?

 

Daniel Murray:

I think growth looks okay. I think that the quid pro quo of very large budget deficits is that that supports activity. We are seeing that in terms of labour markets remaining tight and as long as labour markets remain tight and then despite large budget deficits and fears over slightly higher long end rates, actually I think economic momentum continues. So we may well see a bit of a slowdown in the US although still pretty reasonable growth of 2%, maybe a little bit higher. And in Europe we may well see a stabilisation of growth at around 1%. I think in Europe the most potentially exciting change will be in Germany. So if you get a German government that's a bit more fiscally expansive, that would clearly be positive not just for Germany but for the whole of the rest of Europe. And then the big unknown is what Trump does on the tariff side of things. If he does a lot and he does it quickly, that's clearly going to slow growth and raise inflation. If he doesn't do so much and he implements it slowly, then clearly that's going to have less of an impact on growth and inflation. So I think that's the big unknown for next year.

 

Moz Afzal:

And I think the way I kind of think about it overall growth will be quite good. There's risk in the first half around exactly the points you just made, possibly fiscal cuts as well, starting to have a bit of a bite and an impact and trade if indeed it is as aggressive as he says that certainly slow downs the growth. But then we've got interest rate cuts starting to have an impact latter half of 2025 and 2026 to offset some of that or, if Trump is not as aggressive and he 's using trade as a bit of a bargaining tool. And I guess the other big unknown is China stimulus, if that comes along as well. We've got all the ingredients, quite a strong economic growth forecast for 2025 and well into 2026.

Daniel Murray:

Yeah, I think that's right. I think there's obviously, as Milton Friedman famously said, there are long and unpredictable leads and lags in the cycle. But the policy easing we've seen started this year obviously expects that to start to take effect in the second half of next year. And so that should provide a bit of a tailwind. And then on top of that, if China does decide to go with more stimulus, then clearly that's going to feed through in the month's head as well. And then offsetting that is the potential for tariffs. So I think those are the good points. I think there's also the start of what looks like a little bit of a credit cycle in the US which is something that we need to keep a close eye on, but at the moment that seems to be, it doesn't seem to be a macro systemic type risk. It seems to be something that's more specific.

 

Moz Afzal:

Certainly that will have a pretty positive impact on earnings at the moment. Earnings growth expectations for world equities around 10%, we think it'll be higher than that, particularly if Trump is able to get his tax cuts, corporate tax cuts through. So we are probably in for a bit of an upward surprise I think on earnings growth globally. And obviously those impacts of interest rate cuts and financing costs and so forth will also come through. And I guess China as well if that comes through, that's only help Europe out of its whole at the moment, but I think earnings growth actually looks pretty good. So you can't help thinking that once rate cuts are out the way into H2, where typically when you have rate cuts you have multiple expansions, so valuations look more expensive, earnings then kind of catch up, and then you usually have multiple contractions when earnings growth is pretty strong. So be interesting to see how that dynamic plays out in terms of valuation versus earnings growth in 2025. So I guess the last point today to go through Daniel, is I guess our scenario analysis. What are your thoughts around the base case as we go into 25, between, I guess, soft landing continuation, what we're seeing, no landing at all, and indeed a hard landing?

 

Daniel Murray:

So our base case is soft landing and we increased recently the probability of that up to 75%,  and I think we've passed the point of maximum risk in the US economy. So I think there was risk earlier this year that the lagged impact of higher rates from 22 and 23 was going to really start to bite. And we have seen a little bit of that, but actually the impact's been fairly muted and the economy seems to have powered on through that. Clearly there is a difference here between the US and Europe. So Europe looks to be at a much slower stage of its economic cycle and looks to be more challenged. But I think for the world as a whole, actually given how important the US is, the US is powering on ahead and that economic momentum should sustain global growth. So that's a pretty good thing. And I think that's probably the best outcome for markets.

 

You see growth that's acceptable, inflation that trickles down a bit, policy that eases a little bit but not excessively, and actually that's a reasonably good environment for risky assets. I think the next most likely outcome is no landing or reacceleration. And I think that will play out under the situation that we just discussed, which is where the lagged impact of this year's policy using starts to take effect. You get a bit of stimulus from countries like China and Germany and possibly also Japan, and then that leads to the cycle restarting again. I think that's a reasonable environment for risky assets, but it also carries some risk with it because obviously you start to reignite fears about inflation and rates. And then the tail risk here is recession. And of course timing recessions is virtually impossible. It's a very difficult thing to do. But here I think the way that recession would unfold was likely to be just through a classic credit cycle. So if we continue to see defaults rise, and I think that's one way in which you might see this happen. Another scenario of course is if you were to see another crisis in Europe that perhaps sparked some of the countries like France or Italy having budgetary problems. But I think that's very unlikely.

 

Moz Afzal:

It's going to be quite interesting. Is it, is this the first time certainly in our careers that we've seen an inverted yield curve not actually work?

 

Daniel Murray:

Yeah, I can't remember who said it. Somebody said something along the lines of the yield curve has predicted seven of the last five recessions. So it doesn't always work, but it does normally work. And I suspect that that's connected to the fact that the covid stimulus was so huge. We had roughly 10 years of stimulus compressed into 12 to 18 months. And so I suspect there's a long tail of the benefit of that, and that probably prevented the downside in 23 and 24 sucking the global economy into recession. I suspect that support was just so great that it has smoothed the cycle.

 

Moz Afzal:

So thanks Daniel. That wraps us up in terms of our year in review and our outlook for brief outlook for 2025. For those of you interested, we actually published our outlook for 2025 already. It's actually available on the EFG international website. So please do go through that. And as I mentioned right at the beginning, we will be doing roadshows around the world to present the outlook and there'll be a lot more depth and maybe some slightly different perspectives and what we put into that document, but certainly do go out there and review those. If you can join us, that'd be fantastic. So with that, all is left to say for 2024 is have a fantastic Christmas, a restful Christmas, and we wish you, your families a wonderful 2025 and hopefully 2025 brings us lots of peace and prosperity. So with that, thank you very much and we will speak to you again soon in the new year.

 

 

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