Andy: Hello, I'm Andy Miller, Lead Investment Director at Quilter. I'm joined today by Lindsay James, our Investment Strategist. Lindsay, may I ask you, if we look over the course of last year, 2024, how are market returns?
Lindsay: Well, we saw strong equity market returns through 2024 and those really built into the back end of the year. This was partly because over the course of the year we started to see stronger signs from the US economy. In the third quarter, it had GDP growth of 3.1%, which was expected to continue into the fourth quarter. This is a long way away from the soft landing or recession risks we were thinking about the beginning of the year.
When we look at Europe and the UK, those markets have benefited from slightly lower interest rates and slightly improving earnings growth expectations.
When we think about the bond market, that has been a source of weakness, particularly in the fourth quarter. This is partly because we've seen inflationary trends still hanging around for the last six months with no real improvement coming through. This has meant that central banks have been forced to roll back some of their expectations for interest rate cuts in the year ahead.
We've also seen a new government coming in in the US where there are increasing signs that they're going to be spending big. And because they control both houses of government, we're also expecting very little opposition to those sorts of decisions. So, that's pushed up bond yields through the back end of the year, which means that bond prices, the inverse of bond yields have come down.
Andy: Thank you, Lindsay. So that's 2024 we are at the start of a new year. What do we see shaping market returns over the course of 2025?
Lindsay: Well, partly it's going to be what Donald Trump actually does in the White House relative to what people think he might do. So, at the moment, there's a lot of talk about trade tariffs coming in. I think we're going to get very incremental amounts of new news in this area because it's absolutely in America's interests to keep a high degree of uncertainty for their international trading partners in order to try and extract the maximum they can from them in terms of concessions with negotiations.
However, I think the US economy is going to continue to be strong. The issue for US equities is that valuations are already quite high in this part of the world. So that does mean that the opportunity for markets in the year ahead perhaps might be a little bit more limited than they've been in the last year.
When we look at other regions, for example, Europe and the UK, there's a degree of weakness coming through from slow economic growth. Here, I think the opportunity might be that valuations are pretty low compared to where they've been historically, and expectations are also fairly low for profitability growth in the year ahead. There's an opportunity that they could well do a little bit better than the market expects, particularly if we see interest rates coming down towards the end of the year.
Thinking about the bond market, I think we've noticed in the last few years that bond yields are starting to move a little bit higher than they were before 2020. There's a lot of macroeconomic factors in the background here with high government debts really the most important ingredients to this. So, whilst there's going to be opportunities to make use of the volatility that we see in the bond market, I think the opportunity for returns in this part of the market could be a little bit more limited.
Andy: Lindsay, thank you very much for your time.