Market Overview
Global equity markets rose in January, as investors juggled central bank policy actions, a new earnings season, the advent of “Trump 2.0,” and a possible re-thinking of the narrative for artificial intelligence (AI).
The factors that drove market behaviour in 2024 continued to do so in the new year. The fervor for AI-linked stocks worldwide cooled considerably during the month after a Chinese start-up announced that it had developed an AI model that performed as well as those created by its U.S. Big Tech rivals, but at a fraction of the cost. The stock prices of companies leveraged to AI have soared over the last 18 months on expectations that spending for AI infrastructure would continue to grow significantly to maximise the technology’s profit-making potential. The news out of China jolted stock markets around the world, leading to a steep sell-off of U.S. technology stocks that saw nearly U.S. $1 trillion of their market value wiped out. While these AI-linked stocks clawed back some of their losses in subsequent days, concerns lingered about this potential paradigm shift in AI, which could translate into lower demand for chips, less need to ramp up electricity production to fuel the models, and less need for large-scale data centres. Notably, the sell-off of richly valued U.S. technology stocks benefited European equity markets, which have a materially lower exposure to the information technology sector than their U.S. counterpart, as investors rotated to the Continent’s defensive and growth stocks.
Meanwhile, the interest-rate policy paths of key central banks continued to hang over markets. The focus remained squarely on the U.S., where the Federal Reserve, as expected, held interest rates steady at its policy meeting in January amid data suggesting that the U.S. economy continued to grow, and inflation remained above the U.S. central bank’s 2% target. After lowering borrowing costs at its last three policy meetings in 2024, the Fed warned that it would not cut rates again until it saw real progress on inflation or some weakness in the labour market. Looming over the Fed’s decision to pause its rate-cutting campaign was the start of the Trump administration, whose policies include levying higher tariffs on U.S. trading partners, which could weigh on the U.S. economy and exacerbate inflationary pressure. Global stock markets reacted negatively when the Trump administration confirmed at the end of the month that it would indeed impose promised tariffs on China, Mexico, and Canada, raising fears among investors that such a provocative action could ignite a worldwide trade war. The yield on the benchmark 10-year U.S. Treasury note ended January at 4.54%, 4 basis points (bps) lower than a month earlier.
Across the Atlantic, the European Central Bank (ECB) lowered interest rates for the fifth consecutive time in January amid signs that economic growth in the eurozone was stagnating. Although data released during the month suggested an uptick in annual inflation in the common currency bloc in December, the ECB stated that the “disinflation process was well on track,” and that it expected inflation to return to its target over the course of the year. Elsewhere in Europe, Sweden’s central bank lowered interest rates by 25 bps in an effort to jump-start the country’s sluggish economy, though it signaled that its rate-cutting cycle may be over, and Norway’s central bank held interest rates at a 17-year high and confirmed its plan to lower interest rates in March. In January, the yield on the 10-year German Bund, Europe’s principal safe-haven asset, rose 9 bps, ending the month at 2.46%.
A different dynamic was playing out in Japan, where the Bank of Japan (BOJ) raised interest rates for the third time since March 2024, lifting them to their highest level since 2008. The BOJ’s action in January came as economic reports suggested that Japan’s economic recovery was on track and domestic inflation was sustainably above the Japanese central bank’s target. While acknowledging uncertainty in overseas inflation and foreign exchange fluctuations, Japan’s central bank reaffirmed its commitment to continue raising rates if the domestic economy is stable. The start of a new earnings season provided investors with the latest update on how company profits have held up amid shifting market dynamics. In the US, 78% 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 fourth-quarter earnings growth rate is estimated to have increased 13.1% from a year earlier. In Europe, 47% 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 fourth-quarter earnings growth rate is expected to have expanded 2.9%. In Japan, 57% of the companies in the TOPIX reported positive earnings surprises, surpassing the 54% beat rate over the past four quarters. The fourth-quarter earnings growth rate is estimated to have increased 3.8% from a year earlier.
Against this backdrop, equity markets in both the developed and developing world gained in January, with the former outperforming the latter. In the U.S., the S&P 500 gained but underperformed the broader global index, as strong quarterly earnings results were partially offset by a steep sell-off of index heavyweight technology stocks after a Chinese start-up reported the development of a low-cost AI model. In Europe, the STOXX 600 recorded its best monthly performance since November 2023 and ended January at an all-time high, as investors bid up shares of the Continent’s defensive and growth stocks in the wake of the U.S. led AI-related stock sell-off. In Japan, the TOPIX recorded a modest gain but underperformed, as the stock prices of index heavyweight exporters were hurt by a stronger yen stemming from the BOJ’s decision to raise rates. In China, the CSI 300, a gauge of large Chinese companies traded in Shanghai and Shenzhen, fell on fears that the new Trump administration will carry out its threat of imposing higher tariffs on Chinese exports to the U.S., and worries about the country’s ailing economy, which is now mired in a deflationary spiral.
Communication services was the best-performing sector in January, thanks in part to the strong performance of U.S.-based streaming services. Information technology was the worst-performing sector, as investors dumped AI-related stocks after a Chinese start-up announced that it had developed a low-cost AI model.
Outlook
The long-awaited start to the U.S. Fed rate cutting cycle is now underway. Following a brief initial positive reaction during September 2024, stronger than anticipated economic data and U.S. Presidential administration and policy uncertainty led to a substantial increase in U.S. long bond yields which has weighed on interest-sensitive securities in following months, particularly during December. 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 were a key positive contributor to performance during 2024, 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 favorable 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 favorable spread differentials at key access points.
Elsewhere within the portfolio, we see an abundance of opportunities stemming from large-scale investment in transportation infrastructure, information technology and energy development & security, 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.
The information contained herein provides general information about the Fund at a point in time. Investors are strongly encouraged to consult with a financial advisor and review the Simplified Prospectus and Fund Facts documents carefully prior to making investment decisions about the Fund. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Mutual funds are not guaranteed; their values change frequently and past performance may not be repeated.
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Allocations and security selection are subject to change. The performance quoted represents past performance. Past performance is not a reliable indicator of future results. Mention of these securities should not be considered a recommendation or solicitation to purchase or sell the securities. It should not be assumed that any investment in these securities was, or will prove to be, profitable, or that the investment decisions we make in the future will be profitable or equal to the investment performance of securities referenced herein. There is no assurance that any securities referenced herein are currently held in the portfolio or that securities sold have not been repurchased. The securities mentioned may not represent the entire portfolio.
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.
Securities and instruments of infrastructure companies are more susceptible to adverse economic or regulatory occurrences affecting their industries. Infrastructure companies may be subject to a variety of factors that may adversely affect their business or operations, including additional costs, competition, regulatory implications, and certain other factors.
Certain information contained herein constitutes “forward-looking statements” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “target,” “intent,” “continue,” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events may differ materially from those reflected or contemplated in such forward-looking statements.
Published on February 19, 2025.