7 Minutes on Markets - Q4 2024 Market Update

Ben Kumar: Hello and welcome to the December, the festive edition of 7 Minutes on Markets. I'm Ben Kumar, Head of Equity Strategy, and I'm joined by Sam Hannon, who is an Investment Manager with us.

Sam Hannon: Hello.

Ben: Now, it's been a pretty wild fourth quarter for a lot of reasons. First of all, obviously, the US election, which we'll touch on in a little bit. But actually, despite everything that's gone on in the last quarter and in fact the last year, most people, when looking at their portfolios, can be pretty happy with how 2024 turned out. Most people are going to see if they've got a chunk of equity holdings – some pretty good gains. Everyone is going to pretty much be happy with how at least the endpoint has turned out, even if they didn't enjoy the journey along the way.
So let's talk a little bit about that, Sam. We've talked a lot this year about, you know, tech stocks dominating the market and that may be changing in the summer, and then flipping back again in the last quarter. What do we think?

Sam: Yeah, it's an interesting one. It seems like the majority of returns that we've seen across the year have come from just seven names, or the Magnificent 7 that we know them by now, and it's hard to have seen where else you could have made some money. But actually, what we've seen is, that return spectrum be completely wide across the globe. You've seen good returns in the UK, OK returns in Europe, and some great returns across in the Far East. But what we saw in the middle of the year was that rotation away from those Magnificent 7 names and into these broader areas of the market, where we started to see a little bit of a rotation, albeit that slowed down slightly in the last couple of months, but we still see that Magnificent 7 strength, start to weaken a little bit.

Ben: And the point there is not that those big tech companies are going to suddenly plummet – look, there's always a risk that something untoward can happen – but more like, investors just get interested in other areas of the market. The thing that maybe got them back into the Magnificent 7, though, was Donald Trump. So we've seen a few Trump trades, as they're called. What have they been like?

Sam: It's interesting. I think there was a lot of expectation from the market that the playbook from 2016 would be the same in 2024, and what we have seen is that's pretty much the case. You've seen financials do really well or to paraphrase it, the mum-and-pop businesses in the US, so small businesses in kind of middle America, have done really well at the back of this expectation that Trump will bring some deregulation or business changes that will help fuel growth in areas outside of the Magnificent 7.

Ben: But we're very much travelling rather than arrived. Donald Trump isn't even in power yet, and there's one big thing hanging over the outlook. 2016 proved to be a really good time, but the starting conditions were a little bit different: there wasn't so much in the way of inflation; there weren't all these nervous bits of the global or the global political situation; and we weren't having the kind of tariffs that Donald Trump's talking about now, and that word tariff has got a lot of headlines. But we think that's probably fair, right?

Sam: Yeah, it's quite a scary word, in particular, when you've seen this kind of geopolitical landscape that we have seen over the last four to five years. But actually, when you see the scale of some of the changes that Trump is introducing, the actual impact on the ground, particularly in the US, could be quite inflationary. We could see prices increase or even just global growth slow down. Whereby certain countries are being punished for not being the flavour of the month.

Ben: And I think there's still this somewhat misunderstood point that putting the tariffs on punishes the country that's trying to export the goods to the US, but it also punishes the US consumer. You know, if you put a 20% tariff on a thing, that just means that the US farmer buying it has to pay 20% more, so it hurts the country exporting it because fewer farmers will buy, and those ones who do buy end up paying through the nose for it, which creates a bit of a problem. The other side of tariffs of course, is the retaliatory nature of them. "You put a tariff on my car exports? Well, I'm going to put a tariff on your soybean exports." It kind of degenerates into a really, almost childish, tit-for-tat. And you don't know how far it's going to go because there's nothing economic about it, really. This is all about politics and signalling. So there is a risk, you've seen it already, China, you know, suggesting that Nvidia is going to be investigated for various things that it's done in the past. Or Europe. European carmakers are also struggling already because they're thinking, well, China's not going to want any more European cars, and the US is going to put tariffs on them. What is the future for your BMWs and so on?

So, some good things. The economy is actually doing OK when you look around the world. Interest rates are likely to come down, even if not as quickly as they were previously. And that big bump of inflation is behind us. However, as you know, few of the things we've talked about – Donald Trump in particular – but some of the wars, some of the geopolitics, we know there are flashpoints around the world. Just look at Syria in the last week. No one was really paying attention to in the wider sense. And that has suddenly fallen apart. So what do we do, Sam? What is the – and you know the leading question – but what is the analogy here for how you should build a portfolio?

Sam: Well, we all know what a duck looks like, how a duck quacks, and the sound of a duck quacking. And we think that portfolios should behave like a duck. A duck 90% of the time, the majority of the time, will just bob along the surface of the water of the pond or lake or wherever it decides to live. And often that's just a place to be. Just floating along the surface and just seeing the world part go by. But actually, sometimes, there's a chance that you need to look elsewhere for returns or look elsewhere for food, so you might fly away. You might find a new lake or a new pond to go and find some opportunity, be it new food sources or whatever.

But also, there are times when you have to duck your head under the water. My fun fact is that a duck can last up to 12 minutes underwater. When you need to kind of look for something where you need to protect yourself from anything overhead, or if actually, you think there's something tasty under the water. And we think that's probably the best way for our portfolios to be positioned. Where we see this growing but slowing economic growth across the globe, portfolios just need to be positioned to weather those opportunities where you can fly away to a different lake or pond, and also have the ability to protect yourself, to duck your head under the water in case things get a little bit scary.

Ben: And I think that it's a really helpful analogy. Not just because ducks are cute, but because most of the time, as portfolio managers, we should just be letting the current carry us along. There'll be the odd little thing you want to go and do, but you shouldn't be making big portfolio moves. If you've got your risk right, if you've invested in the right set of assets across the world, which we we believe we have, I think the duck analogy means you'll end up in the right place most of the time. If we see some danger coming, we'll change portfolios. But at the moment, there's no real need to. Most of our signals are at neutral, and so is our portfolios.

That's it from us. Thank you very much, and we'll speak to you next quarter.