Published: December 19, 2024
Despite volatility, the period marked the ninth consecutive quarter of gains for sterling investors in global equity markets. While inflation has peaked, uncertainty over its future direction has increased following the decisive Republican victory in the US elections with the party not just winning the Presidency but also the Senate and the House of Representatives. A balance between Republicans and Democrats in Congress arguably would have been better for stability as this clean sweep theoretically allows Trump freedom to follow through and enact large parts of his manifesto. However, in practice, Trump could be constrained by the narrow majority in the House.
The future path of interest rates has become more unpredictable. On the face of it, Republican plans for tax cuts and tariffs are inflationary. The reality is that the outlook is more nuanced. The policies are not guaranteed to result in higher inflation as businesses may find ways to avoid passing on costs to consumers who in turn may not be in a position to pay them. Meanwhile energy costs, a key driver of inflation, remain subdued. Despite the political developments, the reaction in the bond markets has been subdued; investors still anticipate interest rate cuts, albeit at a slower pace than previously expected.
The latest JP Morgan Global Composite PMI, a survey which aims to measure economic growth, outlined a solid backdrop to the global economy, commensurate with global annual GDP growth of around 3%. Services continue to outpace manufacturing, and the US remains the engine of global growth. One potential concern is a decline in employment in manufacturing.
The equity market has negotiated a number of challenges over the quarter, not least rising interest rates in Japan and concerns about the sustainability of the valuations of the leading technology stocks, which have benefitted from increasing interest in artificial intelligence, in the US. These issues appear to remain a significant source of risk. Despite this backdrop, equity market sentiment has remained broadly bullish over the quarter. With global equity market valuations ahead of historic levels, expectations are high. There are pockets of value, however, and Small Cap equities offer potential upside potential, alongside certain regions including the UK, Brazil and China. Despite the strong performance in Chinese stocks in the September quarter, valuations remain cheap and there is scope for further gains. As ever, a diversified approach remains sensible.
As we approach the end of 2024, global markets have demonstrated a mix of resilience and volatility. While inflationary concerns and shifting political landscapes have dominated the headlines, asset classes such as private equity, credit, property, and infrastructure reveal opportunities for strategic investors.
Below, we delve into a little more detail across the various asset classes.
Private Equity - Jaswant Sidhu, Investment Director – Private Equity
Private equity markets experienced a notable rise in M&A activity, which increased by 27% compared to the previous year, with corporate divestitures accounting for 18% of the transactions. Despite this, the fundraising environment remains challenging, with timelines significantly extended and investor distributions subdued. High-quality assets continue to attract strong competition, while deals with less favourable characteristics are seeing valuations soften, narrowing the gap between buyers and sellers. Optimism is growing, however, as central banks begin to lower interest rates, creating conditions for improved deal flow in the months ahead.
Outlook / Predictions for 2025:
Exit activity is expected to pick-up in 2025, with rising distributions to investors. Fundraising will continue to be bifurcated with the strongest performing managers closing quickly and others having prolonged raisings.
Private Credit - Gillian Day, Senior Portfolio Manager – Private Credit
In private credit, the direct lending market remains robust, with transaction volumes in 2024 already exceeding those of the entire previous year. The sector continues to draw significant investor interest due to its flexibility and ability to structure bespoke transactions. As interest rates stabilise and begin to decline, pressure on borrowers’ balance sheets has eased somewhat, though spreads are tightening as investor demand surges. Cyclical industries, such as real estate and construction, face ongoing challenges, but sponsors’ equity support has kept default rates steady. High-quality credits with modest leverage and robust documentation remain the hallmark of the current vintage.
Outlook / Predictions for 2025:
The private debt market will be keeping a close eye on the Fed and central banks around the world in 2025 as interest rates stay front of mind. The rate cycle continues to be a topic of interest - there is a belief that declining rates will have the effect of stimulating activity to the general benefit of the mid-market – but it is now unclear whether such a cycle is underway.
Property – Mike Hardwick, Investment Director - Property
The property sector is showing early signs of recovery amidst a challenging backdrop. Industrial assets continue to be in demand, particularly those with strong reversionary prospects, while residential property is benefiting from the healthiest buyer demand in three years, according to Zoopla. Prime retail locations are stable, although demand for sub-prime retail assets remains highly selective. Offices, however, continue to be subdued, with little indication of an imminent recovery. Encouragingly, stable inflation and borrowing costs are fostering a more positive environment, which may restore normality to transactional volumes over time.
Outlook / Predictions for 2025:
Whilst a rapid rebound is most unlikely, a steady firming of the market should see some tightening of yields in favoured sectors. Secondary properties and locations are less likely to see capital values appreciating and will therefore be reliant on yield for performance, limiting total returns. With many employers pushing employees to spend more time in the office, there appears to be some reason for more optimism toward the office sector, but any newfound enthusiasm may need to be tempered, as a bottoming out has not yet taken place.
Infrastructure – Nadeem Hussain, Head of Private Markets
Infrastructure remains a resilient and attractive asset class, bolstered by global megatrends such as decarbonisation and digitalisation. Deal activity in Q3 increased by 55% compared to the previous quarter, with Europe leading the way in larger transactions. Electrification is a major driver, with power pricing adjustments contributing to higher-than-expected base-case returns. Despite the sector’s defensive characteristics, disciplined capital deployment remains essential, as recent challenges in utilities, EV charging, and freight transport remind investors that not all infrastructure opportunities guarantee strong returns.
Outlook / Predictions for 2025:
Digital and Energy Transition will continue to be the areas attracting the most investment and it will be interesting to see how this affects the pricing. Deployment should go well especially with the increase in deal flow activity which continues to move in a positive direction. There is generally caution around US assets due to the new political landscape coming in at the beginning of 2025. However, The Inflation Reduction Act has benefitted many of the Republican states, so there is hope that the positive momentum in the market will be left to continue.
Equities - Mark Davies, Head of Public Markets
In Q3,Value stocks outperformed Growth for the first time since 2023, although this does not necessarily indicate a turning point in market dynamics. However, global equity valuations remain elevated, and caution persists around extended valuations in technology stocks, particularly those tied to artificial intelligence. Markets such as Brazil and China continue to offer value relative to historical measures, with opportunities in areas like manufacturing and renewable technologies. Meanwhile, small-cap equities and selective opportunities in the UK and Japan present attractive prospects for investors willing to adopt a targeted approach.
Outlook / Predictions for 2025:
Despite political upheaval, global economic growth is likely to remain solid and give rise to a range of opportunities. A broadening out of equity returns away from the leading US technology stocks seems a plausible outcome
Fixed Income - Ann-Marie Patterson, Investment Director – Fixed Income
In fixed income, the initial rate cuts from major central banks, including the European Central Bank and Bank of England, have made the asset class increasingly appealing. Investors are looking to lock in yields, with current levels in the US and UK nearing 4.5%. However, latent inflation concerns and uncertainties surrounding deficit levels could temper expectations of rapid rate reductions. Credit spreads have narrowed significantly, reflecting optimism, but investors should remain vigilant against potential inflationary pressures that could lead to policy changes or slower rate cuts.
Outlook / Predictions for 2025:
Evolving market environment continues to present risks and opportunity in equal measure, but it also underscores the importance of a long-term perspective and adaptable investment strategies.
IMPORTANT INFORMATION This document has been produced by LGPS Central Limited and is intended solely for information purposes. Any opinions, forecasts or estimates herein constitute a judgement, as at the date of this report, that is subject to change without notice. It does not constitute an offer or an invitation by or on behalf of LGPS Central Limited to any person to buy or sell any security. Any reference to past performance is not a guide to the future. The information and analysis contained in this publication have been compiled or arrived at from sources believed to be reliable but LGPS Central Limited does not make any representation as to their accuracy or completeness and does not accept any liability from loss arising from the use thereof. The opinions and conclusions expressed in this document are solely those of the author.
