Profiles

MARKETS – Year 2024

2024 was another impressive year for risk assets. Continued US economy strength helped developed market equities deliver total returns of +19.2%, and a late rally in Chinese equities coupled with strong results out of India and Taiwan helped emerging market equities deliver +8.1% in US dollar. While the performance of US mega cap tech ensured that global growth stocks dominated for the second year in a row, prospects for deregulation following the US presidential election boosted financials sector helping global value stocks to rise +12.3% over 2024.

Central banks in developed market started normalising policy in 2024, but resilient growth and sticky inflation meant markets pared back expectations for how quickly rate cuts would be delivered, particularly in the US. The combination of a strengthening dollar and rising yields meant global investment grade bonds delivered negative returns of -1.7% over the year.

The S&P 500 was the top performing equity market with returns of +25.0%, and while the “Magnificent Seven” and artificial intelligence related stocks still delivered outsized returns, economic momentum did feed through into a broadening of earnings expectations which is set to continue in 2025.

Conversely, European economic momentum weakened significantly over the year. The manufacturing sector was particularly hard hit due to a combination of high energy costs, damaging regulation, and a lack of export demand.

In Asia, Chinese activity remained weak as the country grappled with falling property prices and weak consumer confidence. Investors were initially unimpressed with the policy response. However, September’s more cohesive policy announcements appeared to convince markets that 2025 would finally see the significant stimulus required to restart the economy. Chinese equities rallied in the second half of the year to deliver +19.8% over 2024. Continued optimism about the end of deflation, coupled with a weak yen and ongoing corporate reforms, helped Japanese equities deliver returns of +20.5% to end 2024 as the second best performing major equity market.

Strong risk asset performance carried over into fixed income markets. High yield bonds were the top performing sector for the fourth year in the row as a combination of high all-in yields and tightening spreads boosted returns to over +8%. Longer duration investment grade credit underperformed against backdrop of rising government bond yields.

European government bonds outperformed US Treasuries as the weaker economic outlook translated into greater confidence in the downward direction for interest rates, though the high starting yield did partially cushion US Treasuries which still delivered positive returns of +0.6% over the year.

OUTLOOK

Fixed Income

In our view, the risk of inflation is greater than the risk of recession, in the US of course, but also in Europe. Coupled with the uncertainties associated with the new US administration taking office, we remain very cautious on duration. We also recognize the refinancing risk associated with a steepening yield curve. For this reason, we consider intermediate maturities to be the best choice.

In credit markets, spreads are unquestionably historically very tight in the corporate sector. However, we also note that the high yield market has never been of such high quality, with 56% of the issues rated BB vs. less than 40% 15 years ago. The number of bonds trading at distressed levels is also particularly low, pointing to a low default rate in 2025 (between 1-1.5%). No room for spread tightening and limited risks of risk widening are suggesting that we’re about to move into a carry environment.

We therefore favour strategies with attractive yields and low sensitivities to rate and spread, such as short-dated High Yield, CLOs, Cat Bonds, Subordinated Financials and Corporate Hybrids. For emerging debt, we prefer Hard Currency strategies and are taking a cautious stance on local debt.

Equities

The environment for active management stays particularly challenging for equities. The strong outperformance of the “magnificent seven” remains the key element for the lack of alpha generation, and there’s no reason to expect a trend reversal. We are therefore maintaining, and recently reinforced, the growth style, while keeping exposure to small caps or long/short strategies with a net long exposure in Europe.

Alternatives

Regarding alternative strategies, we prefer to concentrate on the selection of true market neutral macro strategies or private debt able to deliver returns immune from economic cycles.

We made a few one-to-one switches during the 4th quarter 2024, replacing two portfolio  that  expectations by robust macro strategies.

Unsurprisingly, the best relative performance came from our most defensive portfolio (Yield & Income), which benefited from our tactical positioning (duration and spread) coupled with the added value from active management. The portfolio outperformed its benchmark by 243bps. despite the negative contribution of active management in equity funds.

The Growth Portfolio posted a neutral to slightly negative relative performance (-35bps). Positive impacts from the bond market was offset by negative effects in the equity markets. In addition, the US small cap strategy we selected, performed particularly well in 2024.

Lastly, the Balanced Portfolio suffered same negative and positive effects from the equity and bond pockets, but in addition it was impacted by its exposure to alternative strategies (one-third of the portfolio) which, even though most of them performed positively, tend to lag in favourable market environments. However, it should be noted that, since inception, the Balanced Portfolio’s annualized performance is similar to that of its benchmark (+6.2% vs. +6.1%), while its volatility is significantly lower (7.8% vs. 8.8%).

Yield & Income Portfolio (in USD) +9.5% (+243bps vs. the benchmark)

Balanced Portfolio (in USD) +11.8% (-35ps)

Growth Portfolio (in USD) +8.8% (-77bps)