2024 has been another strong year for risky assets as global equities returned circa 19% driven by US economic exceptionalism which remained largely intact throughout the year as the S&P 500 delivered circa 25% in total returns. Since bottoming in October 2022, the bull market has in fact been a broad one as plenty of stock market indices are up by more than 25% since then. Performance only appears narrow because of the significant outperformance of a small number of large-cap stocks.
Developed market central banks started normalising monetary policy in 2024. However, resilient growth and sticky inflation meant markets pared back expectations for how quickly interest rate cuts would be delivered, particularly in the US. The combination of a strengthening dollar and rising yields meant global government bonds (-3.1%) and investment grade bonds (-1.7%) delivered negative returns in 2024. Despite falling inflation and dovish central banks, duration underperformed as continued economic resilience surprised market participants. The Bloomberg Global Aggregate Index returned only 3.40% in USD hedged terms, lower than cash. In turn, strong risk asset performance carried over into high yield bonds as the top performer in fixed income. High all-in yields and tightening spreads contributed to 2024 returns of circa 6.9% in the EU and 8% in the US in this space.
Looking to 2025, these elevated levels of returns will be difficult to repeat for global risk assets. Inflation is no longer in a clear downtrend in developed countries with a risk of reaccelerating in the US, challenging the monetary easing narrative that has supported markets so far. With global equity valuations elevated despite higher real interest rates and credit spreads at their historical lows, we anticipate volatility in 2025 and seek to remain nimble favouring quality, diversification and growth at a reasonable price.
Markets have entered the year off the 2024 highs after the Federal Reserve ('FED')'s hawkish cut in December suggested slowing the pace of interest rate adjustments going forward coupled with uncertainty about fiscal, trade, and immigration policies during a second Trump administration which challenged market enthusiasm.
On the other hand, economic and political challenges in the EU suggest a higher probability of sustained monetary easing by the European Central Bank ('ECB') benefitting fixed income in the region.
Higher rates for longer in the US could certainly impact risk appetite. This would have clear implications for asset allocation, albeit that fixed income investors would likely suffer more than their equity peers. From a portfolio perspective, we prefer taking risk in equities given tight spreads in fixed income. We think the key drivers of the bull market; resilient earnings and growth-focused central banks together with structural trends and productivity gains, remain broadly in place to support equities.
The key main drivers for 2025 are:
Navigating multiple macro policy crosscurrents
2024 was a major election year and a punishing one for those in power as voters expressed frustration about the higher cost of living after the pandemic. Most notably the American people have given Donald Trump and the Republicans "an unprecedented and powerful mandate". Most risk assets have reacted positively to the red sweep as investors anticipated a potential reflationary economy and the possibility of pro-growth policies, including tax cuts and prospects for deregulation.
Looking ahead markets are waiting for greater clarity on the policy side and whether the FED will manage to cap yields amid inflation and fiscal concerns. Reassuringly, whilst Trump was arguably assertive in both rhetoric and policies during his first term, he ultimately avoided any significantly disruptive course of action. A second Trump presidency will likely involve policy proposals such as tariff hikes and tax cuts that offset each other. Many leaders across developed economies face the challenge of balancing inflation and economic growth.
The desire for political and economic change could continue into 2025. Less government emphasis on macro stabilizing policies could lead to more instances of financial markets enforcing discipline, rising bond yields and risk asset selloffs.
Continued US strength and broadening out
US strength was a central theme in 2024. Despite policy uncertainty, the US economy is outperforming the rest of the world. The path forward may be more volatile, but upside surprises to growth seem more likely than a recession materializing over the course of the year.
As the outlook for global earnings growth improves to +13% in 2025, this is crucially anticipated to broaden in all major regions and sectors. The performance broadening is likely to see the rest of the world playing catch up. European record underperformance looks overdone despite limited growth, talk of tariffs and political turmoil. Low valuations and positioning, a weaker euro, as well as potential for reforms in Germany, peace in Ukraine and material stimulus in China, will likely improve the investment case for Europe. A growth pickup and more rate cuts by the ECB support a modest earnings recovery, setting the scene for a broader cyclical rally.
The rates debate
The rate cutting cycle is underway. The ECB and FED cut interest rates by 1% in 2024, whilst the Bank of England ('BOE') cut by 0.5%. This has resulted in yield curves across developed markets to re-invert as the short end moves lower and the longer end steepens. Central bank easing is expected to continue, but the FED expects only two cuts for 2025, down from the four previously indicated. As a result, markets have sharply re-adjusted their expectations with the 10-year yield pushing markedly higher.
Volatility and upward pressure on bond yields may persist as Trump takes office due to persistent US budget deficits and anticipated inflationary pressures. Similarly, the market is more confident in continued rate cuts in the EU as it seeks to execute its dual mandate and less so in the UK due to inflation concerns.
EQUITY OUTLOOK
US equities (25%) strongly outperformed European equities (9%) in 2024. Last year's advance was heavily skewed by large-cap growth stocks, particularly the Magnificent 7 ('Mag 7'), which collectively soared by 62.7%. In Europe equity returns were limited due to weakening economic momentum, a struggling manufacturing sector together with limited exposure to artificial intelligence ('AI'). The situation was made more challenging as fiscal pressures and the rise of populism led to political turmoil in both France and Germany.
A robust economy, broad earnings growth and a quality tilt underpin conviction in US stocks. Even if US growth moderates, pro-business policies under the new Trump administration, as well as the US capacity to benefit from mega forces such as AI build-out creates opportunities for transformation beneficiaries outside the tech sector. US market leadership is however very much the consensus and thus comes at a high premium. To this end, we remain balanced and ready to adjust if markets overextend. For the US rally to be sustained, rotating away from the large-cap tech names will be beneficial. Going forward, the gap in earnings growth between the Mag 7 and the other 493 is expected to narrow, favouring a pro cyclical tilt.
FIXED INCOME OUTLOOK
The slower than expected monetary policy easing cycle has led bond yields higher. This has presented opportunities for long-term investors to lock in attractive yields in fixed income markets.
The sharp increase in long-end yields since the first FED cut suggests that the market is pricing in stronger growth as perceived risks shift from recession to no landing. This is consistent with equity market gains and no material widening in credit spreads. The current rise in yields is driven by inflation and fiscal risks pushing real yields and the term premium higher.
To this end in the fixed income space over 2025, in the short end we favour the attractive income offered by US Treasury yields as markets are now pricing in fewer rate cuts and Gilt yields as the BOE may cut rates more than the market is pricing given a soft economy.
In terms of duration, we prefer to invest in the belly of the curve and favour European fixed income on greater clarity on easing monetary policy. Given relatively healthy corporate balance sheets and the opportunity to lock-in elevated yields on both a nominal and a real basis we opt for European credit. We remain positive on investment grade corporate bonds for quality income and European high yield given cheaper valuations relative to the US. 2025 has been off to a busy start in the fixed income space driven by supply and rates volatility. European credit has traded well, a testament to strong technicals which could further improve once earnings season blackouts commence. Despite our positive view, we continue to monitor for sharp deteriorations in economic conditions and inflation spikes.
LOCAL MARKET OUTLOOK
Malta's economy continued to demonstrate resilience growing at circa 5% in real terms in 2024, significantly above the 0.7% for the EU. Real economic growth in Malta is expected to gradually normalize as it eases from the 6.7% recorded in 2023 to between 3.9% and 4.3% in 2025 and settle at around 4% annually thereafter. The job market also remains strong as the unemployment rate remains at historic lows of 3% (EU: 5.9%) with expectations to stabilise around this level for the foreseeable future.
The positive economic environment is also demonstrated by the current account balance of payments, projected to stay in a surplus whilst the government deficit is narrowing towards the 3% of gross domestic product ('GDP') target, stabilising public debt at around 50% of GDP, which is significantly below the 90% eurozone levels.
Inflation has been successfully moderated from the peak in October 2022 (MT: 7.4%, EU: 10.6%) to 2.5% and is set to average 2.2% in 2025, in both Malta and the Euro Area. These expectations allow for continued monetary policy easing from the ECB, assuming stability in energy prices and the absence of a wage-price spiral. In the latest budget, the government confirmed its commitment to maintain stable energy prices, resisting external pressures to adjust its blanket support measures.
The tourism sector maintained a strong momentum, with improved air connectivity, supporting record visitor numbers and high hotel occupancy rates. Meanwhile, residential property prices are rising steadily, with growth slightly exceeding the 6.1% annual average since 2021. Stable transaction volumes reflect strong market fundamentals, supported by population growth and limited pass-through of ECB rate hikes. However, the government's planned review of migration policy could impact future demand for property.
Looking ahead to 2025, the outlook for this asset class remains cautious. Discussions around stock buybacks, coupled with a stable economic environment, may encourage increased market activity, achieving improved returns for investors in 2025.
In 2024, Maltese government stocks ('MGS') delivered positive returns driven by investor preference for longer maturities amid the ECB's monetary policy adjustments. The local corporate bond index also experienced significant growth, delivering a strong one-year total return of 7.21%. This reflects local investors' strong preference for higher-yielding local corporate bonds relative to deposit rates. 2024 saw several new corporate bond issues totalling €437 million, offering yields appealing to local investors.
Issuance plans in 2025 include €1.5 billion in new MGS by the government comprising €0.6 billion to refinance maturing debt and €0.9 billion to fund the projected deficit. Strong retail savings and stable economic growth are expected to maintain robust investor demand. Notable corporate bonds scheduled for maturity include International Hotel Investments plc (€45 million) and Hili Properties plc (€37 million). These key issuers in Malta's corporate bond market may seek refinancing through new offerings. Furthermore, it is anticipated that there will be further rate cuts by the ECB that may once again encourage increased bond issuance as companies seek to capitalise on lower borrowing costs.
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