– 2024 turned out to be a great year not just in the developed world, but globally contrary to what many expected at the end of 2023. The top performers in 2024 were crypto currencies, gold and equities. It was a particularly stellar year for equities in the US due to strong earnings growth. As of December 27, 2024, the US equity index S&P 500 was up by +25.2% on the year whereas the European stock index Euro Stoxx 50 only delivered +8.4% over the same period.
– Global emerging market equity index MSCI EM was up by +5.1% year to date, visibly underperforming both the US and the Eurozone. The global equity market returns also reflected this broader positive sentiment with global equity indicator MSCI All Country World Index (ACWI) delivering a solid +17% since the year end. Borsa Istanbul Index BIST100 was up by +34.2% in local currency terms (+13% in US dollar basis) over the year.
– Global bond indexes also delivered positive performance in 2024 unlike their weak performance in 2022 although they didn’t perform as well as they did in 2023. As of December 27th, Bloomberg Global Aggregate Bond Index, Global Corporate Bond Index and High Yield Bond Index all had positive performance respectively delivering +3.1%, +3.5% and +10.6% year-to-date.
– One of the biggest winners of 2024 was gold. Due to geopolitical risks and economic uncertainties gold closed the year with a +27% return. Contrary to gold, crude oil remained relatively weak but stable in 2024 despite markets expecting a strong upward price move. This was predominantly because of the fine supply and demand balance. Crude oil delivered a slight loss of -1.5% on the year as of December 27, 2024.
– Outside the traditional asset classes, Bitcoin had an eye-popping year with an unprecedented and unexpected volatility that carried the crypto currency to +122% annual return as of December 27, 2024. Trump getting in power also supported the crypto world given Trump’s pro-crypto stance. Ethereum, while benefitting from the broader investor base, returned only +45.25% underperforming Bitcoin.
– Global inflation and growth remain elusive as we enter 2025. One thing is for certain though, the recession expected by markets at the end of 2023 didn’t materialize in 2024. In fact, economies turned out to be more resilient than expected. Of course, some countries and therefore relevant investments did better than others, but overall, the theme was soft landing, and the central banks of developed countries started dropping their benchmark interest rates in 2024.
– We think the key determining factor for 2025 will be the policies implemented by Trump presidency. We are not simply referring to the US. This will definitely be a global matter as Trump is very keen to disrupt the existing global trade structures with an effort to make US more competitive. It is no secret that his first 100 days in office will be focused on trade relations with China, and potentially Europe. The NAFTA, or with its new name USMCA, that dictates trade relations between US, Mexico and Canada is also up for review in 2026.
– Despite all the recent positive economic developments, what 2025 may bring for investors remains quite unclear considering the “known unknowns” we discussed above. When we add the “unknown unknowns” to this mix such as unexpected bankruptcies, wars, political upheavals or crisis that may erupt in the least suspected corners of the world and even the possibility of a new pandemic, it becomes very clear that investors should ensure they and their portfolios are ready for a potential market fallout.
– Being a successful investor isn’t simply about predicting the key events. It is about being prepared and knowing how to respond when those key events and particularly a crisis hits. Let us leave you with advice from a famous economist and an investor that we think are rather apt for investing in 2025. As John Maynard Keynes suggested when the facts change, change your mind and as Warren Buffett noted do not forget that “cash and courage in a time of crisis is priceless.”
– Here are the winners and losers of 2024 in financial markets
It is that time of the year again… where many take time off from the hustle and bustle of daily life to have a festive time off with family and loved ones while also thinking about the new year and how to make it better than the previous ones. This is hardly groundbreaking news of course. However, what is interesting is our innate tendency to try to “gauge” the future right at the end of a year as opposed to say in the middle of a year or at any other random time during the year. After all, nothing really “ends” per se on December 31st. Economies don’t reset that night, neither do political parties or even wars. Then why are we so obsessed with year-end outlooks?
It is because this is when we are all simply optimistic about what should, could and will happen in the future. With that optimism, as one year comes to an “end” we get even more hopeful for new beginnings in the new year… and exactly then we tend to look into the future and create a “wish list” for the new year.
This is exactly what the markets like to do too. December is usually filled with market outlooks printed by anyone and everyone who has even a remote interest in the financial markets. One would think that with that many smart people with extensive skills and tools at their disposal, many of these outlooks would somehow turn out to predict the future.
NOONE CAN FULLY PREDICT THE MARKETS
However, time and time again we find out that can’t be farther from the truth. With so many moving parts, it is nearly impossible to predict the global markets even imperfectly. That is because we rely on what we know, add a small doze of what we think we may know and then sprinkle with a bit of our view of the world, and then we project all of that into the future. You may think what we “know” for a fact should provide enough of a solid basis for looking into the future but even that, i.e., what we think we know is usually our “interpretation” of the facts as opposed to actuality.
EVEN FED’S OWN RATE PREDICTIONS DON’T HOLD
A simple example is the markets’ relentless desire to predict the future FED interest rate cuts, one of the hottest debated topics in the markets. We know for a fact that economists constantly opine and sometimes insist on the number and rough timing of future FED rate cuts and increases based on the “data” and “facts” they have. Yet, we also know for a fact that many of these “forecasts” turn out to be “off” even in the short run. How could so many experts be so off? Because there is really no way of predicting the future. Case in point, even the FED itself doesn’t know what their rate cuts will be before the day they make the decision. They do quarterly publish the “dots” which is FED’s own prediction of rate cuts, but they generally turn out to be “off target” at the best of times and rather non-sensical at the worst of times. For those readers who are interested in a deeper dive on this specific topic, we have discussed this problem in greater detail in our January and February 2023 issues.
Let’s get back to our discussion about the market outlook for the new year, the most topical subject for many market players. As our readers may remember, in our year end issues we discuss what transpired in the previous year(s) and provide some insight into the new year. However, we stop short of making full blown “predictions” given the notorious habit of markets to move in totally unexpected direction at the most unexpected times when unexpected events or new information come to light. Therefore, similar to our previous year end analysis, we will look at what happened in the financial markets in 2024, the themes that may extend into 2025, what some of the known unknowns are for 2025 and how investors could watch out and position / reposition their portfolios accordingly.
Let’s start with a brief recap of 2024.
WHAT HAPPENED IN 2024?
In a nutshell, 2024 turned out to be a great year not just in the developed world, but globally contrary to what many expected at the end of 2023. In the below chart we have listed the annual performance of the main investments / indexes in 2024 from high to low.
2024 WAS A GREAT YEAR FOR US EQUITIES
If you look at the top performers in 2024, with the exception of crypto currencies and gold, you can see equities populate the top portion of the list. It was a particularly stellar year for equities in the US due to strong earnings growth. This was particularly driven by the Magnificent 7 that comprise Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA and Tesla which once again outperformed the broader S&P 500 index. As of December 27, 2024, the US equity index S&P 500 was up by +25.2% on the year whereas the European stock index Euro Stoxx 50 only delivered +8.4% over the same period. Global emerging market equity index MSCI EM was up by +5.1% year to date, visibly underperforming both the US and the Eurozone. The global equity market returns also reflected this broader positive sentiment with global equity indicator MSCI All Country World Index (ACWI) delivering a solid +17% since the year end.
The positive outlook in global equities and the strong carry trade greatly supported the Turkish stock markets in 2024. Borsa Istanbul Index BIST100 was up by +34.2% in local currency terms (+13% in US dollar basis) over the year.
RECESSION EXPECTATIONS STARTED TO DISSIPATE
Global bond indexes also delivered positive performance in 2024 unlike their weak performance in 2022 although they didn’t perform as well as they did in 2023. As of December 27th, Bloomberg Global Aggregate Bond Index, Global Corporate Bond Index and High Yield Bond Index all had positive performance respectively delivering +3.1%, +3.5% and +10.6% year-to-date.
More importantly though, the US yield curve which had been inverted since the end of 2021 (blue line in the graph below), finally reverted back to its normal upward sloping shape by end of 2024 (green line). This means the rate markets, at least in the US are now returning to their normal conditions. That is thanks to FED cutting rates and the market dynamics unwinding the expectation of a slow down or recession in the long run. This floated the higher end of the yield curve while dropping the short end of the curve due to lower FED rates. Whether the yield curve will remain as such in 2025 remains to be seen.
Source: Bloomberg
ONE OF THE BIGGER WINNERS OF 2024 WAS GOLD
Amongst key commodities, one of the biggest winners was gold. As our readers may remember we had been underlining gold since 2022 given the geopolitical risks and economic uncertainties. Therefore, it is not surprising to see gold close the year with a +27% return. Gold’s return was mostly boosted towards the end of the year by the US Presidential election although softened up from its peak once the results were called in as discussed in more detail in our previous issue.
CRUDE OIL CLOSED 2024 WITH A SMALL LOSS
Contrary to gold, crude oil remained relatively weak but stable in 2024 despite markets expecting a strong upward price move. This was predominantly because of the fine supply and demand balance created by the potential production increase by OPEC+ and weakness in global macroeconomic fundamentals vs. the conflict in the Middle East, a major oil-producing area. At the end of the day crude oil delivered a slight loss of -1.5% on the year as of December 27, 2024.
BITCOIN HAD AN EYE-POPPING YEAR
Moving outside the traditional asset classes, Bitcoin had an eye-popping year with an unprecedented and unexpected volatility that carried the crypto currency to +122% annual return as of December 27, 2024. This was thanks to commoditization of Bitcoin and Ethereum through the approval of ETFs by SEC in January and May 2024 respectively which made both crypto currencies more available while also signaling a broader acceptance of crypto as form of an investment. Trump getting in power also supported the crypto world given Trump’s pro-crypto stance. Ethereum, while benefitting from the broader investor base, returned only +45.25% underperforming Bitcoin.
While our focus is on 2024, it may also help to get a better sense of how returns of various investments can change over time, we share a rank of the same investments and indices from high to low in 2024 with their 2023 and 2022 performances right below them. The purpose of this chart is to reiterate one of our main messages, which is consistency isn’t one of the fortes of the markets. What performs great in one year may be a dud the following year as illustrated in the chart below. Hence the power of diversification in a portfolio.
WHAT ARE THE “KNOWN UNKNOWNS” GOING INTO 2025?
Will inflation subside & developed central banks continue to cut rates?
Global inflation and growth remain elusive as we enter 2025. One thing is for certain though, the recession expected by markets at the end of 2023 didn’t materialize in 2024. In fact, economies turned out to be more resilient than expected. Of course, some countries and therefore relevant investments did better than others, but overall, the theme was soft landing, and the central banks of developed countries started dropping their benchmark interest rates in 2024. Below graph shows how the leading central bank monetary policy rates have dropped since 2024 after hitting their peaks similar to those in 2007/2008 right before the Global Financial Crisis.
Source: BIS
The question is where do we go from here? Looking at what happened after 2008 in the above graph, one could conclude there is much more room for further rate cuts. Is that correct? Further rate cuts by the main central banks seem likely although not clear to what extent considering the sticky inflation and looming global trade war that may be triggered by the new Trump administration in the US which we discuss further below.
What will the Trump administration focus in its first 100 days?
When considering the upcoming year, the first place to look at is the current status. We think the key determining factor for 2025 will be the policies implemented by Trump presidency. We are not simply referring to the US. This will definitely be a global matter as Trump is very keen to disrupt the existing global trade structures with an effort to make US more competitive. It is no secret that his first 100 days in office will be focused on trade relations with China, and potentially Europe. The NAFTA, or with its new name USMCA, that dictates trade relations between US, Mexico and Canada is up for review in 2026. It was last negotiated in 2020. Despite some serious noise, not much was changed in the trade agreements. This may or may not be the same as last time. Given US and Canada have the largest bilateral trade relations in the world, any significant change could prove to have major repercussions not just for these two countries but globally as well. Why? Because a good portion of that trade includes natural resources.
It is not clear if these renegotiations may have an inflationary impact or just remain as a one-time price change. However, we already know what happened during the last Trump administration. As the graph below illustrates, the price increases turned out to be inflationary. There is also the risk that a potential trade-war may weigh on global growth. This is one downside risk that investors should keep a close eye on.
What are the potential geopolitical risks on the horizon?
There is no shortage of geopolitical risks at any given time. However, they do not all pose the same level of risk to financial markets. While some tend to have a larger and more extended impact others dissipate shortly.
For example, following Russia’s attack on Ukraine in February of 2022 global power dynamics shifted in a secular fashion. While the markets reacted very negatively for a few weeks, the impact faded as the markets figured the fallout from the event was a contained situation for financial markets. Another fallout was from the Hamas attack on Israel on October 7, 2023, because of its broader and global repercussions. Its impact was relatively smaller but was more extended through commodities. This was partially due to Israel’s counterattack directed at some of its neighbors. As Hamas still holds hostages some of whom are US citizens, there is a chance that US may retaliate. The incoming ex-President already threatened retaliation if the hostages were not released when he takes office in the new year. While it is hard to gauge what Hamas may do and what “retaliation” means for US, the fact that there is an increased geopolitical and therefore financial risk in this region is undeniable.
While they may not necessarily be considered “geopolitical risks,” Trump’s recent jests geared towards a US expansion into Canada, Panama and Greenland should probably not be dismissed given the unexpected and fiery nature of the ex- / new President. While sounding funny on the surface, there is a strong economic argument to be made for any or all of these countries/regions “joining” the US, even if under some form of an economic union similar to that of European Union. While the odds may be low, any progress on this front may shift the global power and trade balance in favor of North America.
Will Artificial Intelligence revamp our lives in 2025?
Here is one true known unknown for 2025 and beyond – artificial intelligence (AI). It is impossible to avoid AI in any aspect of daily life from banking to grocery shopping to Instagram. Lately AI is so pervasive that it is impossible to read a market outlook that doesn’t discuss how AI could impact markets and returns in the medium to long run. We therefore feel obliged to mention the same, although there is not much tangible data to dig deep on this front. That is because it is still a minuscule part of the global economy and while its growth is certain, the time frame and the direction it may take remain is anybody’s guess right now. The good news is, in the context of markets, AI is generally considered as an upside influencer, i.e., it isn’t expected to pose any potential downside risks, at least not at this stage. This however doesn’t mean investors should ignore AI. Rather, they would be advised to keep a close eye on the developments to get a sense of the trends to inform their investment decisions, particularly in the tech segment of their equity portfolio.
INVESTORS MUST REMAIN VIGILANT FOR A POTENTIAL MARKET FALLOUT
Unlike our positive sentiment for 2024 and despite all the recent positive economic developments, what 2025 may bring for investors remains quite unclear considering the “known unknowns” we discussed above. When we add the “unknown unknowns” to this mix such as unexpected bankruptcies, wars, political upheavals or crisis that may erupt in the least suspected corners of the world and even the possibility of a new pandemic, it becomes very clear that investors should ensure they and their portfolios are ready for a potential market fallout. As we discussed before, contrary to common belief, major market downturns are more frequent than we’d like to believe. If we go back a century, on average markets have seen a form of a major downturn every 6-8 years.
We would like to remind that being a successful investor isn’t simply about predicting the key events. It is about being prepared and knowing how to respond when those key events and particularly a crisis hits. Let us leave you with advice from a famous economist and an investor that we think are rather apt for investing in 2025. As John Maynard Keynes suggested when the facts change, change your mind and as Warren Buffett noted do not forget that “cash and courage in a time of crisis is priceless.”
Wishing a happy and prosperous new year with unlimited opportunities and lots of “calculated” courage!
ELA KARAHASANOGLU, MBA, CFA, CAIA
International Investments Director
karahasanoglu@turcomoney.com
ela.karahasanoglu@ekrportfolioadvisory.com
https://www.linkedin.com/in/elakarahasanoglu/
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