MARKET PULSE: MID - DECEMBER 2024

Fixed Income on the Backfoot as Reflationary Risks Resurface


EQUITY MARKETS

Despite the upcoming holiday season, equity market volumes in the US recovered to levels higher than those observed in November. European equity benchmarks strengthened over the past two weeks, with Italy’s FTSE MIB index returning 4.41%, followed by Germany’s DAX index with a return of 3.97%. On the other hand, the MSCI World Index returned only 0.24% over the same period. Despite Germany's ongoing economic struggles, its equity benchmark rose by 7.38% over the past month, significantly outperforming other regional equity benchmarks.

While the CAC 40 performed well over the past two weeks, its performance remains notably weaker than that of other European peers, with a marginal year-to-date return of 1.31%. Political uncertainty continues to weigh on the country. Over the past fortnight, France entered a period of political turmoil after the minority coalition was brought down following a no-confidence vote. This was triggered by Michel Barnier’s decision to force through the 2025 fiscal budget, which proposed addressing the country’s fiscal position with a €60bn combination of tax increases and spending cuts. Despite this uncertainty, capital markets responded positively, as the minority government was perceived as a source of instability. Markets remain hopeful that greater political stability in France will provide the foundation for future economic progress. In the US, the Nasdaq Composite continued to outperform, while mid- and small-cap indices were the worst performers during the period.

In the corporate sector, Broadcom reached a $1 trillion valuation mark as the chipmaker emerged as a winner in the AI cycle, with revenue surging by more than 220% in fiscal 2024. Porsche SE announced write-downs on its holdings in Volkswagen and Porsche AG, as both companies came under pressure—particularly Volkswagen, which is undergoing a restructuring process expected to involve factory closures and significant job cuts. HSBC continues to downsize its retail banking operations outside the UK and Hong Kong in an effort to cut costs. The bank has reversed its expansionary strategy, which had driven growth through acquisitions since the 2000s. In recent years, HSBC has been regarded as focused on the most profitable areas of its business, exiting markets considered scale-dependent.

ByteDance’s TikTok is facing mounting pressure in the United States, as the "divest or ban" law is set to take effect on 19 January 2025. The US Department of Justice has deemed TikTok a national security threat. This week, the US House of Representatives sent letters to Apple and Google, operators of the app stores, reminding them that updates and downloads of the app will be prohibited from 19 January 2025. TikTok will be hoping that Donald Trump, who previously promised to "save" the social media platform, will follow through on his comments. On the legal front, TikTok’s final hurdle is the Supreme Court, which must decide whether it will hear an appeal. Meanwhile, the UK government now holds less than 10% of NatWest as it moves closer to full private ownership. This follows the £46bn bailout during the financial crisis, when the bank was known as RBS.


SECTOR PERFORMANCE

Consumer Discretionary was the clear winner for the first two weeks of December in both Europe and the United States, with performances of 6.43% and 7.39%, respectively, over the period. In the US, eight out of the eleven sectors were in negative territory, while Europe had five out of the eleven sectors in the red. Overall, sector performance was broader in Europe than in the United States.

In the US, the Consumer Discretionary and Communication Services sectors significantly outperformed the rest, with returns of 7.39% and 6.68%, respectively, in USD terms. In Europe, Consumer Discretionary, Information Technology, and Financials performed strongly, with returns of 6.43%, 5.66%, and 4.59%, respectively, in EUR terms. In the US, the Energy, Utilities, and Materials sectors had the worst performances, with returns of -6.46%, -6.35%, and -5.73%, respectively. In Europe, Real Estate, Energy, and Utilities were the weakest performers, with returns of -2.74%, -2.36%, and -1.92%, respectively.


CENTRAL BANKING AND GEO-POLITICS

During the period, the Federal Reserve published its Beige Book for November 2024, revealing that economic activity rose slightly across most districts. Business surveys indicated optimism that demand would rise in the coming months, as consumer spending remained generally stable. Employment levels were steady, with prices rising modestly across the districts, driven primarily by higher insurance costs, although profit margins weakened. In Europe, the European Central Bank (ECB) lowered its interest rate by 25 basis points, basing its decision on the inflation outlook, the dynamics of underlying inflation, and the strength of monetary policy transmission. The ECB further explained that the disinflation process is underway, with ECB staff projections indicating headline inflation averages of 2.4% in 2024, 2.1% in 2025, and 1.9% in 2026. For core inflation, projections expect rates of 2.9% in 2024, 2.3% in 2025, and 1.9% in 2026.

Meanwhile, France has returned to political turmoil following the collapse of the minority government, which formed the executive branch of French politics. This led to a no-confidence vote against Prime Minister Michel Barnier after a budget proposal to increase taxes and cut spending failed to gain approval in the National Assembly. The European Commission has already pressured France to address its budget deficit and overall borrowing levels. During the period, Moody’s downgraded France’s credit rating by one notch, from Aa2 to Aa3, citing political instability expected to undermine efforts to manage its budget deficit. This is projected to push the country’s debt-to-GDP ratio from 113% in 2024 to 120% in 2027. China made headlines in December by signalling plans to boost its economy through increased public borrowing and spending in 2025, as it shifts its focus towards greater consumption. The country plans to raise its fiscal deficit target in 2025, marking the second time in a decade that it has prioritised "lifting consumption vigorously." Details remain limited, and markets will be closely watching for further policy interventions in the coming period.


COMMODITIES

China’s signal to stimulate its economy should have positively impacted commodities, but this did not materialise. Industrial commodities, which are highly sensitive to China’s economic performance, were weighed down by the lack of details in China’s economic plan. Gold and silver remained relatively unchanged during the period.


CURRENCIES

The US dollar continued to strengthen amid the “soft landing” narrative for the US economy, which has reassured investors and encouraged them to favour US investments over those in other regions burdened by elevated risk factors.


OVERALL

Markets remain overall stable as valuations continue to rise, with various equity indices reaching record levels. Potential downside risks remain a concern for many investors, as the change in the US President is expected to destabilise the global political system, potentially making global investors more cautious about investing in non-US markets compared to the US. This partly explains the high level of global interest in dollar-denominated asset classes.

General disclosure:This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Aria Capital Management (Europe) or any of its related companies to participate in any of the transactions mentioned herein. This material may contain links to third-party websites or content. These links are provided for your convenience only and do not constitute endorsement or approval by ARIA Capital Management (Europe) and is not responsible for the content of linked third-party websites and does not endorse or guarantee the information, opinions, products, or services offered on these websites. Please review the terms of use and privacy policy of any third-party website you visit. The products managed by ARIA Capital Management (Europe) are typically available via professional advisers rather than individual investors, who should not rely on this information, but contact their financial adviser. This information is not intended to be complete or exhaustive and no representations or warranties, either express or implied, are made regarding the accuracy or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. Please refer to the relevant Prospectus and other relevant documents and/or the terms and conditions for any services offered for detailed information. Past performance does not guarantee future results. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation. Investors should seek financial advice before making any investment decisions. The products and services here may not be available to residents of all jurisdictions. The investments underlying the company and its sub-funds do not take into account the EU criteria for environmentally sustainable economic activities.

ARIA Capital Management (Europe) Limited is authorised and regulated by the Malta Financial Services Authority, with Firm Reference number FEXS. A Limited Company registered in Malta No: C 26673. ARIA Private Clients is a trading name of ARIA Capital Management (Europe) Limited. Padraig O'Riordan and Paul Dee act as tied agents of ARIA Capital Management (Europe) Limited in Ireland.

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