January 2025 -
As of 31 December 2024
Finding middle ground
Entering the new year with US large‑caps continuing their dominance, led by a narrow set of names, has investors once again asking when, if ever, a broadening in participation will take hold. We certainly had fits and starts last year with smaller companies outperforming in July when markets were expecting a very dovish Fed, only to quickly unwind. They again came to life post‑election in hopes for supportive policies, including deregulation and lower corporate taxes, only to fade once again as large‑caps dominated into year‑end. As we face heightened uncertainty around policy changes, inflation, rates and the Fed’s reaction to each, mid‑cap equities stand out. Mid‑cap relative valuations remain attractive versus large‑caps, and relative to small‑caps, they are less vulnerable to higher rates, deliver more profitability and have less exposure to concentrated sectors. As we continue to anticipate a broadening in the market, the ‘middle ground’ should be well‑positioned to participate.
Flip‑flop
Just a few months ago, the Fed’s narrative around easing policy began to shift towards stabilising the labour market as it showed comfort with the decelerating path of inflation. The Fed seemed to flip‑flop on that at their December meeting, taking a more hawkish tone on inflation, even as they lowered rates. The seemingly abrupt shift in tone caught markets a bit by surprise as they expected the ‘data‑dependent’ Fed to need a more notable reversal in trends for such an abrupt change. What was notable before they met was the outcome of the US election, which markets quickly reacted to, speculating on the future impacts of policy changes. It seems like the Fed is now taking these risks into consideration as they make their policy decisions, which could further increase uncertainty on the path for rates.
For a region-by-region overview, see the full report (PDF).
Yoram Lustig is the head of Multi-Asset Solutions, EMEA and Latin America, in the Multi-Asset Division. He also is a portfolio manager and the chair of the UK and European Investment Committees.
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