Q4 Market Review: Key Takeaways
Rate Cuts Slow Down: The US Federal Reserve, ECB, and SARB cut interest rates by 25 basis points, but expectations for further cuts have diminished due to persistent inflation.
US Dollar Strength: The dollar strengthened sharply, rising 7.7% (DXY index), pressuring emerging market currencies, with the South African rand depreciating 9.7%.
Equities Under Pressure: Emerging markets, including South Africa, faced declines due to weaker commodity demand and Trump’s trade policy fears. US equities rose on election optimism but slowed in December.
Interest rates saw a flurry of activity as central banks adjusted to persistent inflation and evolving economic conditions. The US Federal Reserve cut rates by 25 basis points in November, aligning with expectations. However, a month later, chairperson Powell signalled a reduced outlook for rate cuts in 2025 due to “stickier” inflation, with CPI at 3.2% year-over-year in November.
Similarly, the ECB executed 25 basis point cuts in both October and December, driven by the Eurozone’s weak growth prospects. The Bank of England mirrored the Fed’s caution, reducing rates by 25 basis points while tempering expectations for further cuts.
South Africa’s SARB followed its easing trajectory, cutting rates by 25 basis points in November as inflation hit a low of 2.8%, its lowest since 2020, providing room for further easing. However, with the Fed’s dovish pivot, the SARB may recalibrate its path.
The US dollar strengthened significantly in Q4, with the DXY index surging 7.7%. This dollar rally weighed heavily on even the strongest currencies, including the Rand, which depreciated 9.7% to close the year at R18.78, after trading much of the quarter in the R17 range.
Political developments played a key role in market movements. Donald Trump’s majority win in the November US elections sparked optimism, with markets rallying on expectations of tax cuts, deregulation, and pro-growth policies.
Global: Trade Wars
Trump’s majority win in November intensified global attention on anticipated U.S. policy changes. Markets responded positively to expectations of tax cuts, deregulation, and pro-growth policies, driving U.S. equities higher. However, uncertainties around trade, immigration, regulatory shifts, and fiscal measures remain significant, supporting U.S. growth outperformance while raising concerns about potential global supply shocks from extreme policy shifts.
Eurozone and emerging market equities struggled amid fears of Trump’s tariffs. Emerging markets, particularly China, face substantial uncertainty in 2025 as they navigate between U.S. policy shifts and domestic challenges. South Africa and India closed the quarter lower in U.S. dollar terms, underperforming the broader EM index.
The outlook for 2025 suggests diverging central bank policies, uneven disinflation, and advancing technology will drive divergence in global business cycles. With markets previously eager to price in rate cuts during late 2024, the persistence of a high-for-long rate environment could temper expectations this year.
SA: Domestic Outlook
South Africa’s economic outlook is showing signs of improvement, with inflation dropping to 2.8%, its lowest level since 2020, and falling below the SARB’s midpoint target.
Given South Africa’s reliance on the global economy—particularly the U.S., which is poised to influence global dynamics in the coming months—it will be crucial to monitor how these developments shape the domestic landscape in the next quarter.
Q4 Equities Review
Global equities showed mixed performance in Q4. The MSCI World Index edged up 0.8%, reflecting stalled global growth, while the S&P 500 gained 2.1% after rallying on Trump’s election win, only to lose momentum mid-December as the Fed tempered rate cut expectations. Despite an earlier broadening of returns in Q3, reliance on the “Magnificent 7” tech stocks returned, driving US market gains.
Export-driven economies struggled amidst fears of Trump’s trade policies, with emerging markets bearing the brunt—MSCI Emerging Markets Index fell 9.4%. South African equities had a tough quarter, as the JSE All Share Index declined for three straight months, erasing a portion of its annual gains.
China also faced headwinds, with property market concerns and a lack of policy follow-through overshadowing its Q3 stimulus. The Shanghai Composite plunged 14% at the start of the quarter before recovering half of those losses to end down 8.8%.
Japan continued its modest yet positive momentum, reflecting improved business sentiment. Conversely, UK equities fell as a result of the Labour government’s £40 billion tax hike, the largest since 1993.
In Europe, political instability and stagnant growth compounded underperformance. The region’s limited exposure to the booming IT sector further widened the gap with US equities, as AI stocks continued to drive gains stateside.
Q1 EQUITY Allocation
US equities historically tend to rise in the year following an election. The base case remains bullish, with Trump’s deregulation agenda expected to support growth. However, a third consecutive year of 20% gains in the S&P 500 would be unusual, and investors anticipate returns closer to the index’s 11% historical average.
With large-cap stocks showing stretched valuations, small- and mid-cap stocks may attract attention due to their relatively cheaper pricing and expectations of broader market gains.
European equities remain sluggish, with little sign of a near-term recovery. In the UK, despite cheap valuations and favorable outlooks from fund managers, the latest budget has shaken business confidence, and the economic outlook remains bleak.
While uncertainty surrounds the direction of the US economy, a supportive domestic environment could favor South African equities, though caution persists with Trump’s first term on the horizon.
Emerging markets, led by China, may face challenges as Trump’s tariffs threaten export-driven economies.Meanwhile, Japan enters the first quarter with momentum from positive corporate reforms, having posted strong gains in the previous quarter. However, potential rate hikes by the BoJ this year could temper equity growth.
Q4 Fixed Income Review
The yield curve steepened throughout the year, with long-term yields rising and short-term yields falling due to central bank rate cuts. This unusual movement during a rate-cutting cycle reflects investors’ revised outlooks for higher growth, inflation, and fewer rate cuts.
Money market yields also fell, closely tracking central bank policy adjustments.
The US 10-year Treasury yield climbed 80 basis points to close the quarter at 4.57%, driven by fiscal uncertainty surrounding the incoming Trump administration and persistent inflation. Hawkish comments from the Fed in December further pushed yields higher.
In Europe, political turmoil in Germany and France fueled bond market volatility, with 10-year bond yields rising. The UK’s Labour budget announcement spurred a sharp increase in gilt yields, with the 10-year yield rising 18 basis points.
Meanwhile, South African 10-year yields stabilized after a sharp 200 basis-point drop earlier in the year, as domestic investors shifted away from longer-duration bonds. Yields have largely priced in the positive sentiment surrounding the GNU.
Emerging markets faced a challenging quarter as rising US Treasury yields and a stronger dollar created headwinds.
Q1 Fixed income Allocation
Cash & Short Duration: The outlook for cash is negative, with falling interest rates significantly lowering yields in money market funds.
We’re neutral on short duration, as many funds still hold a significant portion of 3-5 year maturities in their portfolios. This duration continues to be a major component of income-focused funds.
Long Duration: Long-duration bonds maintain a positive outlook due to their relative attractiveness in the current environment. Yields remain historically high, providing opportunities for long-term investors.
With most global fixed income funds having average maturities of between 7 and 8 years, long-term bonds are favored. Notably, 55% of the iShares Core Global Aggregate Bond Fund is composed of bonds with maturities between 3 and 10 years.
Regional Focus:
US: The outlook for the next quarter is neutral, with yields expected to remain range-bound amidst mixed investor sentiment.
South Africa: Bond yields are unlikely to fall further after being supported by easing inflation, lower domestic interest rates, and prior expectations of rand strength. However, they continue to offer among the most competitive yields in emerging markets, maintaining appeal despite limited upside. With SA retail rates now higher than those seen in October, they continue to present an attractive investment opportunity.
Q1 Currency Allocation
United States Dollar (USD): A Trump presidency continues to support a strong dollar, with reduced expectations for US interest rate cuts, further bolstering its strength. Markets now anticipate just one rate cut this year, down from two previously expected, with near-certainty of this scenario priced in.
British Pound (GBP): Whilst the pound is more protected from a trade war with the US, weaker economic growth and rate cuts mean the pound will likely not perform as well as it did in the preceding year.
Euro (EUR): The Eurozone remains highly vulnerable to trade conflicts. The lingering Russia-Ukraine war and the potential for a trade war further darken the outlook for the euro, which becomes bearish.
South African Rand (ZAR): The rand remains vulnerable to a strong dollar, with fewer US rate cuts posing a downside risk. While the rand may depreciate further against the dollar, it could perform better against the relatively stable pound and euro.
