Global Market Review – December 2024

Global equities made strong returns in 2024, but pulled back in December upon uncertainty around future US trade and monetary policies. Lower interest rates, tax cuts and deregulation should support corporate earnings growth and valuations in the US and globally in 2025.

US drives global markets higher in 2024

December brought an end to a year of strong equity market returns as the global economy remained robust and interest rates began to move lower. Global shares soared 18.7%, but performance varied enormously across markets.

Returns were driven by continued strength in US share markets, which are heavily exposed to surging demand for AI applications. The S&P500 gained 23%, while the more technology-focussed Nasdaq soared 30%.

Returns were more muted in Europe (+8.1%) and Asia ex-Japan (+12.5%). However China (+19.8%) benefitted from government stimulus in the second half, while a weak yen and corporate governance reform supported Japanese shares (+20.5%).

Investors take profits in December

Investment markets finished 2024 with a whimper rather than a bang, closing down 2.6% in USD terms during December, but gaining 2.6% in AUD terms as the Australian dollar weakened.

Equity weakness signalled a perception that global share markets are currently expensive, trading on high multiples of earnings.

It also reflected uncertainty as the new US administration’s policies on areas such as global trade remain unclear. There are concerns that higher tariffs, tax cuts and lower immigration will bring higher inflation, signalling a possible early end to the US interest rate-cutting cycle.

Investors remain worried about the European economy, after October data showed industrial production remains lower than 12 months ago, especially in Germany.

China’s economy remains subdued, where the weak property sector and high youth unemployment continue to constrain consumer spending. Retail prices fell 0.6% in November, with annual inflation at just +0.6%.

But lower interest rates provide support

Continued global share market gains requires further corporate earnings growth, which depends on US economic strength. In November, the US created more jobs than forecast, unemployment remained low at 4.2% and wage growth accelerated to 4.0%, although inflation remains constrained at 2.7%.

This should enable the Federal Reserve to cut interest rates further in the new year. This follows the Bank of Canada easing by 0.50% to 3.25% and the European Central Bank lowering its rate by 0.25% to 3.00% during December.

Meanwhile, the Japanese yen weakened further as the Bank of Japan held rates unchanged. This supports Japanese exports and stocks continue to benefit from ongoing corporate governance reforms, which should boost shareholder returns.

Australian share markets take a seasonal break

Australian shares moved lower in December, in line with global markets, following a year of reasonably strong returns. Prices of key commodities such as iron ore remain subdued due to weakening demand in China and high inventory levels.

The Reserve Bank of Australia (RBA) kept interest rates unchanged at 4.35%, in line with market expectations. December’s weak Westpac consumer sentiment reading signals a slowing economy, but the RBA will have been concerned that consumer inflation expectations increased to 4.2%. Interest rate cuts could be pushed back further by fiscal expansion ahead of the Federal election, which must be held by May.

Higher for longer interest rates are impacting Australia’s real estate market, which saw a 0.1% fall in home values during December, according to CoreLogic.

Outlook

• ‘Higher for longer’ interest rates have slowed the global economy but services inflation persists
• Interest rates are expected to fall further in most developed economies over the coming quarters, except in Japan
• Slower consumer spending and weaker industrial output are impacting the earnings of some cyclical companies
• Geo-political risks remain elevated
• Stocks able to grow earnings through the business cycle should outperform as the economy slows