Market Overview
Equity markets worldwide receded in December, as investors digested the latest developments impacting the global interest-rate outlook.
The journey toward global disinflation hit another speed bump during the month after a closely watched gauge of U.S. inflation suggested an uptick in price growth in November. While U.S. inflation has slowed considerably since hitting a peak in 2022, the last several months have seen a modest reacceleration in price growth that has raised concerns that the progress the Federal Reserve (Fed) had made in quelling high inflation had stalled. As expected, the Fed lowered interest rates by 25 basis points (bps) at its policy meeting in December, marking its third rate cut in 2024. More importantly, the world’s most influential central bank forecasted just two rate cuts in 2025, half the number it projected last September, due to the recent uptick in inflation readings, and uncertainty on what impact the incoming Trump administration’s policies will have on the U.S. economy, especially if it is successful in enacting tax cuts and levying higher tariffs on imports. The Fed also stated that it was entering a new phase, one in which it will be more cautious about cutting rates and will want to see more progress on the disinflation front before cutting borrowing costs again. The Fed’s more hawkish pivot triggered a sharp rise in U.S. Treasury yields as bond traders were forced once again to reset their expectations, which, in turn, cranked up the pressure on global stock markets by undercutting their appeal. The yield on the benchmark 10-year U.S. Treasury note ended December at 4.58%, 40 bps higher than a month earlier.
Major central banks in Europe also made news during the month. In the eurozone, the European Central Bank (ECB) reduced interest rates for the fourth time in 2024 with a 25-bp cut. While the ECB stated that inflation in the eurozone was “really on track” to meet its 2% target, its latest action came amid a slew of risks confronting the common currency bloc, including a weakening economy, political uncertainty in Germany and France—the region’s two largest economies—and the threat of significant U.S. tariffs on European imports. In the U.K., the Bank of England (BOE) held interest rates steady despite the country’s dimming economic outlook and after data suggested that domestic inflation in November accelerated from a month earlier. The BOE also announced that it would take a gradual approach to easing its monetary policy and would not commit to when or how deeply it would cut rates in 2025. Elsewhere in the Continent, Switzerland’s central bank cut interest rates by a larger-than-expected 50 bps as it sought to arrest the strengthening of the Swiss franc and protect the country’s exporters; Sweden’s central bank reduced interest rates for the fifth time in 2024 with a 25-bp cut but warned that it would take a more cautious approach in 2025 despite suggesting that the country’s economy remained stagnant; and Norway’s central bank held interest rates at a 16-year high but forecasted three rate cuts in 2025. In December, the yield on the 10-year German Bund, Europe’s principal safe-haven asset, climbed 28 bps, ending the month at 2.37%.
Meanwhile, in Japan, the country’s central bank held interest rates steady in December. The Bank of Japan’s latest policy decision came after it had earlier surprised investors by hinting that it may wait longer before raising interest rates, citing the need to monitor how various risk factors in Japan and abroad might impact the country’s economic outlook.
The conclusion of the latest earnings season provided investors painted a mixed picture of how company profits have been impacted by the shifting global monetary landscape. In the U.S., 75% of the companies in the S&P 500 Index that reported results topped consensus estimates, which was above the long-term average of 67%. The third-quarter earnings growth rate increased 6.0% from a year earlier. In Europe, 51% of the companies in the STOXX 600 Index that reported results posted better-than-expected earnings, below the 54% that do so in a typical quarter. The year-over-year third-quarter earnings growth rate expanded 4.4%. In Japan, 44% of the companies in the TOPIX reported positive earnings surprises, which lagged the 58% beat rate over the past four quarters. The third-quarter earnings growth rate increased 7.4% from a year earlier. In Hong Kong, 44% of the companies in the Hang Seng Index registered better-than-expected earnings, underperforming the 49% beat rate over the past four quarters. The third-quarter earnings growth rate increased 13.3% from a year earlier.
Against this backdrop, equity markets in both the developed and developing worlds fell in December, with the latter outperforming the former. In the U.S., the S&P 500 performed in line with the global benchmark, weighed down by the Fed’s announcement that interest rates may stay “higher for longer” in 2025, and investors taking profits after the index recorded strong gains in 2024. Across the Atlantic, the pan-European STOXX 600 underperformed, as worries about mounting risks facing the eurozone overshadowed news that the ECB had cut interest rates. In Japan, the TOPIX slipped but outperformed, as the yen depreciated against the U.S. dollar after the BOJ unexpectedly held interest rates steady at its December policy meeting. Meanwhile, in China, the Hong Kongbased Hang Seng Index, which is indicative of foreign investor sentiment, climbed after China’s central bank announced a more accommodative monetary policy stance in 2025 to support the country’s ailing economy.
Materials was the worst-performing sector in December, as shares of gold miners declined in sympathy with the modest fall in the price of the precious metal. Traders were worried about the demand outlook for gold due to a strong U.S. dollar and elevated yields on Treasury bonds. Communication services was the best-performing sector, as investors bid up shares of U.S.-based mega-cap technology companies leveraged to artificial intelligence.
Outlook
The long-awaited start to the U.S. Fed rate cutting cycle is now underway. Following a brief initial positive reaction in September, stronger than anticipated economic data and U.S. Presidential election uncertainty led to a substantial increase in U.S. long bond yields which weighed on interest-sensitive securities in following months. Along with financial markets, we await incremental datapoints to affirm or dispute continuation of the trend in easing inflation and resilient growth in GDP and employment.
Utilities have been a key positive contributor to performance this year, albeit this has been heavily concentrated in the U.S. While we maintain a favourable sector outlook for Utilities and foresee scope for upward earnings revision, valuations have also re-rated higher, and we do not expect the same pace of returns for utilities to continue in the U.S. On the other hand, we continue to find very compelling valuations and opportunities in utilities outside the U.S.
Outside of the utilities sector, midstream energy, namely oil & gas storage and transportation, looks to have mostly shrugged off the downward pressure from oil & gas commodity prices as the earnings outlook remains favourable and valuations look compelling. The vast majority of the cash flows associated with the portfolio’s holdings are fee-based and enjoy strong support from the volume of energy molecules transported as well as favourable spread differentials at key access points.
Elsewhere within the portfolio, we see an abundance of opportunities stemming from large-scale investment in transportation infrastructure and renewable energy development, leading to increased demand for materials, capital goods and industrial equipment. We believe the portfolio remains well-positioned to take advantage of these opportunities in real asset infrastructure businesses as well as key enablers, including materials, services, and technologies, that will both facilitate and benefit from increased investment in infrastructure.
We believe publicly-listed infrastructure remains well-positioned to benefit from a continued brisk pace of investment, with plenty of runway ahead, and an end to the rate-hiking cycle, as eventually lower interest rates are used to discount cash flows that have been adjusted higher either for regulatory or contractual inflation-adjustment, or the indirect benefit of inflation adjustment that tends to stem from owning and operating high fixed cost, long life assets.
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Equity securities will fluctuate in price; the value of your investment will thus fluctuate, and this may result in a loss. Securities in certain non-domestic countries may be less liquid, more volatile, and less subject to governmental supervision than in one’s home market. The values of these securities may be affected by changes in currency rates, application of a country’s specific tax laws, changes in government administration, and economic and monetary policy. Emerging markets securities carry special risks, such as less developed or less efficient trading markets, a lack of company information, and differing auditing and legal standards. The securities markets of emerging markets countries can be extremely volatile; performance can also be influenced by political, social, and economic factors affecting companies in these countries.
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Published on January 16, 2025.