Review of 2024

Great man theory…

For future historians gazing back at 2024, perhaps the return of President Trump will blot all else out. Or perhaps his box office return will be relegated to a footnote, with other events and individuals ultimately proving more consequential as time passes. As usual, that perspective will depend a great deal on what comes next – our view of history is always being changed by the twists and turns of the present.

In any case, the sense that the world has transitioned into quite unfamiliar climes continued. Talk of paradigm shifts is mostly the preserve of (really) bad pub chat. However, there remains a strong sense that we have been substantially changed by the last few years in particular.

Many of those changes will be too subtle to observe for a data set that tells half-truths about the economy and society unreliably (getting more so in many cases). This should make us hesitant of labelling 2024 too confidently for posterity and warier still of focusing only on top-down explanations.

Boom

For investors, the year is possibly a little simpler to summarise. This was yet another year where you should have closed your eyes, turned off social and other media feeds, and just invested. If you had risked a skim through the industry’s year ahead outlooks, you would have understandably wondered why bother?

The ‘year of elections’ promised only geopolitical, electoral, and other chaos, with a nailed-on US recession for garnish – surely only someone who cares little for their hard-earned savings would deploy them into investment markets at such a point? Alongside the industry’s annual dirge, the siren calls of relatively high interest rates on deposits helped lure many onto the rocks of disinvestment.

Those investors have been punished by forfeited gains (Figure 1). The reality of this year saw risky assets, such as US stocks and credit, supercharged by an absence of the expected recession and an increasingly present technological revolution.

Figure 1: Risky assets rallied in 2024

Note that past performance is not a reliable guide to future performance.

Source: Bloomberg, Barclays. Data as of 21 November 2024, ATS as of September 2024. Asset classes in GBP and represented by the following indices: Cash & Short Maturity-Bonds, Barclays Sterling Treasury Bills (0-12M) TR GBP; Developed Government Bonds, Barclays Global Treasury TR Hgd GBP (60%), Bloomberg Barclays Global Inflation-Linked TR Hgd GBP (40%); Investment Grade Bonds, Barclays Global Agg Corp TR Hgd GBP; High Yield and Emerging markets Bonds, BofAML US HY Master II Constrnd TR Hgd GBP (40%), JPM EMBI Global Diversified TR Hgd GBP (30%), JPM GBI-EM Global Diversified TR GBP (30%); Developed Markets Equities, MSCI World NR GBP; Emerging Markets Equities, MSCI EM NR GBP; Commodities, Bloomberg Commodity TR GBP; Alternative Trading Strategies (ATS), HFRX Credit Arbitrage TR Hgd GBP (25%), HFRX Merger Arbitrage TR Hgd GBP (25%), HFRX Active Trading TR Hgd GBP (25%), HFRX Systematic Diversified TR Hgd GBP (25%).

The surge in US business startups, enabled in part by the pandemic, seemed to stick. Meanwhile, many of the advances in the technological frontier were often breathtaking¹, albeit likely not relevant just yet to the sharp pick-up in US measured productivity of this year.

The same was not true everywhere of course. China’s wrestle with the aftermath of its giant property bubble became more frenetic, which in turn reverberated to parts of Europe. The plight of the German economy in particular worsened substantially, ultimately tangling with political crisis in the last part of the year, with many wondering whether the fiscal restraint/self-harm will relax a little as a result.

Another bad year for economic models

This was another year where economic theory lost multiple battles with reality. Sharply higher interest rates did not usher in a widespread downturn in the developed world. In fact, the US economy seemed to be accelerating for much of the year, even while we waited for the first policy rate cuts. This was always possible. Much of what we think we know about the economy rests uneasily on our post-Second World War experience.

This is the period we have some data for, albeit still poor and incomplete. Seven or so decades sounds like a lot from which to derive rules and norms to predict the future? Surely there is not too much new under the sun when thinking about the economy? This year was a reminder that neither of these is true.

Part of this is that data on the economy tells partial truths. If we could reliably assume that these were the same parts of some truth over time, that would be useful, but we can’t. Meanwhile, the opportunity provided by technology, the keystone of long-term economic growth, is neither measurable in real time, nor continuous. The opportunity comes in lumps and tends to warp all else around it. Furthermore, as we have routinely pointed out these last several years, it’s not just different this time. It’s different every time.

Thrills and spills

Predictably, the biggest capital markets bump of the year came from an event not predicted by calendar or indeed any other outlook. Tentative improvements in Japan’s economic outlook upended many investors who had been betting hard (with a range of motivations and structures) that stagnation would continue. The gentle flap of Japanese central bank butterfly wings stirred cyclones in assets as far flung as the Mexican peso and US equities.

Capital markets can be seen as the world’s circulatory system. Capital is moved quickly and efficiently to the areas where it is needed. You might think of bumps and bruises as equivalent to risk premia, providing signals that help lure capital to the right places at the right times. Necessary in this piece is the clarifying profit motive.

However, with that motive comes quite a lot of behavioural baggage as we know well. We can be linear thinkers. The longer a trend goes on, the more confidently we extrapolate that trend into the future. Investments follow. Japan had become a very popular way of funding trades elsewhere in the world. Borrowing in reliably low Japanese interest rates to bank the spread offered by more exotic return profiles worked for so long, it became investment canon. The explosion was briefly spectacular.

The question we must ask ourselves at the end of another barn-storming year is where else do we assume too much?