Q1 2025 Review & Q2 2025 Outlook
Skybound Group Chief Investment Strategist Jabir Sardharwalla reviews fund Commentary: Q1 2025 Review & Q2 2025 Outlook
Fund Commentary: Q4 2024 Update
As we reflect on the past few months, it becomes evident that both Q3 and Q4 have been eventful periods, characterized by significant market movements and key global events. Q3 delivered strong returns, creating an impression of calm markets; however, this was far from reality. The quarter was marked by three key themes: (1) two significant bouts of volatility, (2)the much-anticipated -0.50% interest rate cut by the Federal Reserve (the Fed),and (3) a substantial stimulus package announced by China.
Market Volatility
The first wave of volatility occurred at the end of July, peaking in early August, driven by misinterpretations of U.S. labour market data. Weaker-than-expected employment figures raised concerns that the Fed may have delayed its rate cuts too long, potentially jeopardizing economic stability. The second bout, in September, was triggered by the unwinding of a major "carry trade" following theBank of Japan's (BoJ) unexpected +0.15% interest rate hike, which led to a sharp appreciation in the yen. This move caught many asset managers off guard, resulting in a market correction. Additionally, investigations into Nvidia for alleged antitrust violations and delayed filings by Super Micro created jitters in the tech sector, driving a rotation from growth to value stocks.
Fed Rate Cut
The Fed's 0.50% rate cut was well-received across all sectors, significantly benefiting fixed-income markets. Government and corporate bonds performed strongly, and market expectations for future rates shifted markedly. At the end of Q2, the projected mid-2025 rate was 4.4%; by the end of Q3, expectations had dropped to 3.2%.
China's Stimulus Package
The People's Bank of China (PBoC)introduced extensive stimulus measures, including monetary, property, and market-related interventions aimed at boosting sentiment. The long-term impact of these policies remains to be seen.
Q4 Insights: A Dynamic Quarter in Review
As we approach the end of November, Q4 has proved to be justas dynamic, with major global events shaping market sentiment. The quarter has been influenced by political upheavals, continued central bank activity, and evolving geopolitical tensions.
U.S. Presidential Election
Perhaps the most significant development was Donald Trump’s unexpected victory in the U.S. presidential election. Trump’s return to office has injected considerable uncertainty into markets, with renewed promises of deregulation and protectionist economic policies. While U.S. equities initially rallied on hopes of lower corporate taxes and increased infrastructure spending, investor sentiment soon turned cautious amid concerns over the potential for trade tensions with China and theEuropean Union. Bond yields climbed in response, as investors anticipated increased government borrowing.
Middle East Tensions
The ongoing conflict in the Middle East escalated in earlyOctober, leading to heightened volatility in global energy markets. Oil prices spiked briefly before moderating as diplomatic efforts, led by European nations, brought some stability to the region. Energy stocks saw a temporary boost, but higher fuel prices have added to inflationary pressures, complicating central bank policy responses.
Fed and ECB Stance
The Fed held its course at the November meeting, opting to keep rates unchanged amid mixed economic data. Inflation is trending lower, but uncertainty around fiscal policy under the new administration has made the central bank cautious. Meanwhile, the European Central Bank (ECB) surprised markets by announcing a modest rate cut of 0.10% to support the weakeningEurozone economy, particularly in the face of declining industrial production in Germany and ongoing stagnation in Italy. This move pushed the euro lower, benefiting European exporters but adding further pressure on consumer prices.
Corporate Earnings Season
The Q3 earnings season extended into early November, and tech companies continued to experience headwinds. Nvidia faced mounting regulatory scrutiny, which weighed on the broader sector, while positive surprises came from traditional value sectors, such as industrials and healthcare. The market saw a continued rotation from growth to value, reflecting a more defensive stance by investors.
China's Continued Struggles
Despite the stimulus measures announced in Q3, China’s economic recovery has been slower than anticipated. Property sector challenges persist, and consumer confidence remains muted. The government has hinted at additional measures, but markets have reacted with scepticism, as structural issues within the economy continue to hinder a robust rebound. Asian markets have been choppy, reflecting this ongoing uncertainty.
The past two quarters have been defined by a mixture of optimism and caution. Trump's return has created an uncertain backdrop, while geopolitical tensions and central bank moves have added complexity to an already challenging investment landscape. Market participants remain vigilant, balancing potential opportunities arising from fiscal stimulus and deregulation with risks associated with geopolitical developments and global economic imbalances. As we move into December, our outlook remains cautious yet opportunistic, with a focus on sectors that may benefit from fiscal expansion, such as infrastructure and value-oriented equities, while maintaining defensive positions in fixed income to hedge against ongoing volatility.