Welcome to the Quarterly Investment Review for Q4 2024.

Our Investment team have put together a range of resources to update you on what has happened in the markets across the fourth quarter of 2024. Here you will find:

• A listed summary of the major events impacting markets
• Videos from our team of investment experts
• A written commentary

Hear from our team:

With Trump promising significant corporate tax cuts and an influx of pro-business policies, in Q4 we saw a huge shift towards the US.

But what can we expect from Q1 2025? Hear from Senior Portfolio Manager, Sean Mills, and Head of Investment Management, Antony Kelsey as they review the past three months and provide their outlook for markets Q1 2025.

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Chocolate Chips - The dual surge of Al and Cocoa investments across 2024:

With the year firmly behind us investors are taking a moment to reflect on the most significant market shifts that took place across 2024. Most notably the emergence of an AI supercycle, which has been the driving force of rocket-like growth for most major US indices. This year alone, tech and AI centric stocks have propelled US indices to close at new record highs an astonishing 53 times this year.

While the AI megatrend dominates headlines, opportunity hunters may do well to broaden out their search for opportunities in market segments outside the AI spotlight. In 2024 a surprising standout emerged from a specific area of the commodities market.

Let’s take a closer look at cocoa, a valuable soft commodity that has delivered year-to-date returns on par with the AI darling NVIDIA.

At the time of writing, both NVIDIA and cocoa futures delivered impressive 185% returns this year. So, the next time you savour a fine Belgian praline and notice yet another price hike, consider this: entrenched inflation isn’t the only factor driving up cocoa prices. Here are some reasons why cocoa has matched the returns of the intricate and complex of AI models and chips:

1. Historic Supply Deficit: The global cocoa market recorded its largest deficit in over 60 years during the 2023-2024 marketing year. This shortfall stemmed from significant crop failures in Ivory Coast and Ghana, the world’s largest cocoa producers.
2. Adverse Weather Conditions: Unfavourable weather and supply tightness in West Africa—which accounts for around three-quarters of global cocoa production—were major drivers behind this year’s skyrocketing cocoa prices.
3. Record Highs in Futures Markets: Cocoa futures for March delivery in New York hit a record high close to $12,000 per metric ton, further underscoring the commodity’s meteoric rise.
4. Market Volatility: The tightness in both cocoa and coffee markets, combined with ongoing weather uncertainties, suggests that prices are likely to remain volatile well into next year.

Despite the lack of high-profile market moves akin to those in tech, cocoa and coffee futures have delivered substantial returns for professional commodity traders. These examples highlight the vast opportunities available when investors broaden their horizons beyond the hotly watched tech and AI sectors. Alternative assets can indeed yield significant returns—sometimes rivalling the very best of the tech giants.

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Summary & Outlook - Q4 2024:

With 2024 now behind us we provide a quick review of the year and some commentary on the fourth quarter below.

The year began with the Euro Stoxx and Nikkei outperforming most major U.S. indices. However, this changed dramatically mid-year following political turmoil across Europe and the historic unwinding of the USD/YEN carry trade, which erased considerable value in European and Japanese markets. Chinese markets experienced a rebound thanks to significant monetary and fiscal stimuli implemented by the Chinese Central Bank and Politburo – although questions were raised over the sustainability of the recovery.

As the economic outlook grew clearer, investors shifted their attention from weakness in Europe & Asia to the U.S where growth was strong.

For the year major U.S. indices once again exceeded expectations, outpacing both European and Asian peers for the second consecutive year. The NASDAQ and S&P 500 reached new record highs 53 times in 2024, with the NASDAQ gaining 27% and the S&P 500 returning 25.5%. The UK’s main index and the Euro Stoxx both rose by 9%, while the Nikkei climbed 21%—all in local currency terms.

As for the final quarter, markets experienced notable volatility with large moves across equities, bonds, and commodities. Poor performance in December retraced much of the gains found in November ending the quarter negative.

In the U.S. tech and AI breakthroughs spurred year-end growth—exemplified by Google’s new quantum chip and its potential for unprecedented computing power. Donald Trump’s re-election sparked an election-driven rally in November on promises of tax cuts and deregulation, though inflation worries surfaced. Late in the quarter, volatility returned when the US Federal Reserve signalled a more cautious approach to interest rate cuts amid expectations of higher real growth and inflation heading into 2025 causing both bonds and equities to sell off shortly before year end.

Europe also weakened due to further signs of poor productivity, with a continuing contraction in manufacturing, and heavy bureaucratic burdens. Fiscal pressures in France and the UK weighed on both outgoing and incoming governments, adding to increasingly negative sentiment.

Global fixed income performed poorly after bond markets came under pressure when the Federal Reserve indicated a slower pace of rate cuts in 2025 signalling a slowdown to the perceived rate-cut pathway for 2025. High-yield bonds remained the top performers, whereas longer-duration investment-grade bonds lagged. European government bonds outperformed U.S. Treasuries, as the ECB continue to cut rates more aggressively than the Fed due to differences in economic strength (Fed base rate:

4.25%; ECB base rate: 3%). UK Gilts were the weakest among government debt securities. The UK still has higher base rates (4.75%) and low GDP growth.

On to our outlook for 2025:

We anticipate continued growth in the U.S, though at a more moderate pace. Market leadership may remain concentrated in a few technology heavyweights poised to capitalize on sizable AI infrastructure investments. The AI Supercycle should continue to unlock new innovations, bolstering productivity and driving pockets of outperformance as the market better understands AI’s transformative applications. However, with US equity markets trading at historic premiums, there remains both concentration and valuation risks. The U.S. may encounter additional inflationary pressures from trade tariffs and tax cuts, yet we expect the U.S. dollar to stay resilient. We believe that the UK and EU will remain hampered by political and economic hurdles, with stringent regulations and low adoption rates potentially limiting their ability to benefit from these new technological advancements.

We are optimistic about the opportunities the new year presents, while remaining vigilant to political, economic, and market risks. Equity market returns, especially in the US, have been notably strong over the past two years, and we anticipate further, but tempered, upside. As we head into 2025, our focus will be on selectively increasing our conviction exposures while maintaining diversification to help offset risk. Balancing optimism with caution will be essential in the coming year in expectation of further bouts of volatility.

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‍Disclaimer: The views, thoughts and opinions expressed within the article / videos are those of the author / speaker(s) and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security or to make a bank deposit. Any reference to past performance is not necessarily a guide to the future. The value of investments may go down as well as up and may be adversely affected by currency fluctuations. CIG, its clients and officers may have a position in, or engage in transactions in any of the investments mentioned. Opinions constitute views as at the date of publication and are subject to change.

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