Written by: Alex Da Costa
A (quick) look back at 2024:
Economic growth continued to be solid in 2024 while inflation cooled, allowing the major developed market central banks to begin cutting interest rates from the post 2008 Global Financial Crisis “GFC” highs reached in 2023. This supported the performance of equity markets with 33 out of the 47 countries in the MSCI World All Country Index hitting new all-time highs in the first half of 2024. The trend of USA exceptionalism continued with the leading US stock market index, the S&P 500, hitting 57 new all-time highs to finish the year up +25%. Global Equities (as represented by the MSCI World Index) were up +19.2% while in Canada, the S&P TSX was up +21.7%. The US Dollar continued its upward march, ending +7.0% on a global trade weighted basis and +6.6% versus the Canadian dollar. While central banks cut short-term interest rates, longer-dated bonds delivered less impressive performance than some expected. The rise in the “term premium” (the difference between short- and long-term interest rates), reflected a growing concern over the path of government deficits. In the USA for example, the total Federal deficit hit $36 Trillion with estimated annual interest costs rising to $1 Trillion a year. In commodities, gold glittered, up +27% on the year, again partially reflecting growing concerns about rising deficits.
Where do we go from here:
At a high level we remain constructive on the outlook for global growth and markets, but we do anticipate more volatility along the way. There are several factors underlying this view but probably the most important is the scale of political change.
In 2024, more than 70 countries held national elections, affecting over half of the world’s population. As remarkable as this was, the most striking thing was not the number, but that in more than 80% of these elections, the incumbent party lost power either partially or completely. There are many theories around this, but it seems probable that general discontent over higher inflation and wages failing to keep up was a factor. Another feature of these elections was a trend in many major economies towards more right-learning governments. Again, there may be many reasons for this but what’s clear is the winds of change are blowing, and this is likely to have a marked impact on the economy and markets.
The USA is a prime example. The new administration is generally perceived as pro-growth with pro-business policies such as slashing regulation and lowering taxes. However, they are also vocal on other policies such as those on immigration and tariffs, which could prove to be disruptive. Overall, we would expect the net outcome to be positive but there is certainly plenty of scope for surprises.
While the outlook for growth looks supportive, inflation is harder to forecast. Our base case is that inflation should continue to moderate but disruption to global trade flows through geopolitical re-alignment could alter the path of inflation significantly.
With expectations of solid growth and inflation moderating around current levels, we anticipate that central banks may have less scope to make large interest rate cuts. Market expectations for US interest rates to fall to around 3.5% and Canada to around 2.5% in this cycle seem reasonable to us. It would likely take a severe growth and/or inflation shock for interest rates to fall back to the post GFC/COVID-era lows.
One question on everyone’s mind is the strength of the US Dollar. In our experience, currency markets are notoriously difficult to forecast, and we have yet to meet any forecasters who have consistently made the right calls. Our own view, for what it’s worth, is that the US Dollar’s place as the global reserve currency is secure and, while it could continue to appreciate further from here, we ultimately expect to see reversion to lower levels in the medium term.
How will all of this impact asset prices? We are broadly positive on the outlook for the major asset classes. Some asset classes like Public Equity and Public Credit maybe be somewhat less attractive on a valuation basis relative to history but should still offer attractive long-term returns. In Private Markets (Private Credit, Private Equity and Real Assets), there continue to be many attractive opportunities but our view that interest rates will remain higher for longer makes us cautious on more highly leveraged strategies. In Real Estate for example, owners of highly levered assets with vulnerable capital structures will continue to experience stress. Some of these owners have resisted selling at lower prices in the hope that lower rates will provide an opportunity for more favourable exits, but the window for many is closing. This will of course present opportunities for new buyers to come in at potentially attractive prices.
We do think that the environment for Fixed Income and Diversifying Strategies looks particularly attractive relative to history. While interest rates should fall a bit lower from here, we do not expect them to fall sharply back to post-GFC/COVID era lows. In this environment, we think that Fixed Income offers attractive yields and if inflation continues to moderate, bonds could once again start to provide meaningful diversification. Diversifying Strategies like Hedge Funds should continue to benefit from higher volatility, an increase in corporate activity like M&A and higher equity dispersion (the difference in performance between stocks). With interest rates still expected to fall somewhat from here, Cash is the asset class where we have the lowest conviction and recommend investors consider investing overweight cash positions elsewhere.
In our Quarterly Client letter, we discuss all of these asset classes in more detail. If you would like to learn more about Prime Quadrant, please reach out to Bailey Cochrane at businessdevelopment@primequadrant.com.
Disclaimer: Any opinions expressed in this article may be changed without notice at any time after publication. The information in this presentation (the “Information”) does not constitute an invitation, inducement, offer or solicitation in any jurisdiction to any person or entity to acquire or dispose of, or deal in, any security, and interest in any fund, or to engage in any investment activity, nor does it constitute any form of investment, tax, legal or other advice. The value of all investments and income can go down as well as up (which may be caused by exchange rate fluctuations). The past is not necessarily a guide to future performance.
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