After a rally in risk-on assets in November, we saw a pullback in equities as investors began to consider the prospect of higher and more persistent inflation, along with concerns around the enactment of tariffs and whether this will disrupt and challenge international trade relations.
The US economy continues to run hot with Q3 GDP growth being revised up to 3.1% (from 2.8%). In contrast, growth outside of the US continues to falter, with UK real GDP growth unexpectedly falling 0.2% over the same period.
It was also another busy month of Central Bank activity with the Federal Reserve and ECB looking beyond rising headline inflation in November, both cutting rates by 25bp to 4.25%-4.5% and 3%, respectively. However, Jerome Powell indicated that the Fed will be “more cautious as we consider further adjustments to our policy rate”. The prospect of interest rates remaining higher for longer, as well as concerns around inflation and the expected increase in the supply of bonds, which pushed government bond yields higher in December.
The impact of higher yields was also felt in equity markets, with US equities drifting lower over the month. However, despite the fall the S&P 500 has had another remarkable year, trouncing the returns of other major markets. Whilst developed markets struggled to make further progress, within Emerging Markets we saw positive performance from the Pacific North of South EM All Cap and EM Income Opportunities funds, with another year of outperformance in an environment which has been challenging for active managers.
Finally, our allocation to diversifying assets positively contributed to performance as the strategies continued to demonstrate their low correlation to equities and bonds. The PAM 2s 10s Steepener position benefited as US longer term yields moved up relative to short term yields, a position that we expect to be useful in 2025 as investors demand higher returns for the uncertainty of US policy and the outlook for interest rates.
