The outcome of the presidential election triggered a broad rally in November, while long-term treasury yields rose despite the US Fed’s ongoing cuts to the federal funds rate. The dip in the Australian Dollar threatens RBA rate cuts despite moderating inflation.
Choppy Quarter for Markets
With no shortage of market-moving events during a very active fourth quarter, traders saw Wall Street’s fear gauge – the VIX Volaility Index – sharply spike in the second half of December to 27.62 (Chart 1). At 74%, this was the second largest percentage hike in its history after the Federal Reserve announced it would dial back its rate cutting campaign to just twice in the new year. Typically, a value greater than 20 in the VIX indicates a higher level of fear in the market, and noisy economic data in recent months makes it difficult to discern a consistent narrative that fits all the information.
Global equity markets had a slow start to the quarter, but the outcome of the presidential election triggered a broad rally in November across risk assets including cryptocurrencies which surged 40% on the back of Trump’s support. Trump has discussed creating a government strategic stockpile of Bitcoin, similar to the US’s existing gold and oil stockpiles and has since nominated cryptocurrency advocates to chair the Security and Exchange Commission (SEC) and the Treasury. Trump enters office with a very ambitious agenda spanning trade reform, immigration, tax cuts and deregulation.
Despite a favourable market response, the US Trade Policy Uncertainty Index has peaked at an all-time high (Chart 2), and US equities remain expensive as the NASDAQ moves another 6.35% higher, taking its annual gain to a staggering 29.57%. Trump is seen as positive for spurring growth and corporate profits through tax cuts and further trade reform; however, these policies may also result in some inflationary pressure that changes the narrative yet again.
With the US inflation rate now at 2.9%, it remains higher than the Federal Reserve’s target of 2%. The US Central Bank cut interest rates on December 18th by 25 basis points to a range of 4.35-4.50% as expected, however, indicated with a cautionary tone that there would probably only be two rate cuts in 2025. This sent the market into a frenzy that caused risk assets to take a dive as the VIX surged. The MSCI World fell almost 2% last month while the ASX 200 index fell over 3% to its lowest level since September in a broad sell-off that delayed the anticipated ’Santa Rally’. Coinciding with this change in narrative was a spike in global long-term bond yields through December reflecting increased inflation uncertainty and a higher term premium (Chart 3).

The increase in bond yields saw a corresponding fall in the price of gold over December as it becomes more attractive to hold bonds in a multi-asset portfolio rather than the precious metal. Meanwhile, crude oil has had a very choppy ride over the last quarter of 2024, with Brent spiking to US$81.75 due to Middle East conflict before ending the quarter at US$74.58 on concerns about a supply surplus in the new year and a strengthened US Dollar. Other commodities including copper and nickel have also had significant price declines over the last quarter due to weakening global demand, concerns over Trump’s economic policies and their implications for China, and a stronger US Dollar which makes them more expensive.
Bleak Picture for the Eurozone
December’s Economic Sentiment Indicator (ESI) paints a grim picture of the state of the eurozone economy at the end of 2024, sharply falling to the lowest level since 2020 (Chart 4), as the European Central Bank (ECB) continued to cut interest rates. Most European stock markets posted mild declines over the quarter while the German DAX hit record highs despite a sluggish manufacturing sector. The deeply pessimistic sentiment and significant underperformance of European markets is beginning to attract contrarian investors looking for potential value opportunities, though it may be too early to overweight the region given the recent fall in production expectations.
In addition to this, the Euro area annual inflation rate ticked up to an annual 2.4% in December, up from 2.2% in November, indicating the ECB may also tone down their rate cutting cycle into 2025. The lagging productivity may result in a longer term slump, however. There are a few structural drivers of the Eurozone underperformance relative to the US, and the loss of access to cheap Russian energy is material but doesn’t explain all. Weak investment and low capacity utilisation due to Russia’s invasion of Ukraine is a major driver as it is the manufacturing sector feeling the most pain currently. A lack of fiscal support as disbursements from the Recovery Fund have not accelerated meaningfully is also contributing to underperformance, while consumer spending remains low.
German and French industrial production have both lagged the region, with Germany’s exposure to China being a critical factor as it has transitioned from being a consumer of German high-tech goods to a producer of such products and thus introduces new competition. Overall, the Eurozone recovery is not over though faster interest rate cuts should provide some relief to manufacturers and the deployment of the Recovery Fund cash will bolster aggregate demand.
The Australian Dollar Dips
The local stock market seriously lagged its global counterparts in the last quarter, ending the year up 11.44% while the long term bond yield inched higher in the fourth quarter of 2024 following on from the US Fed’s messaging. The top 10 stocks in the ASX 200 account for 49% of the index and the big four banks are now considered so overvalued, that Barrenjoey analyst Jon Mott claims they are the most expensive banks in the developed world, trading on average at 21 times their one-year forward earnings which is a “world record”. The index concentration presents heightened risks in a portfolio that aims to be well diversified across sectors, regions and asset classes therefore it is a good time to begin trimming domestic equities and reallocating to other portfolio buffers such as private infrastructure and alternatives, while maintaining a diversified global equities exposure.
Meanwhile, the Australian Dollar hit its lowest levels against the greenback since the start of the pandemic, hitting as low as US61¢ (Chart 5) on the back of a still weak Chinese economy, the threat of tariffs under Trump and the US Fed signalling fewer rate cuts are likely in 2025. AMP chief economist Shane Oliver says these factors have “come together in the perfect storm for the Aussie dollar”.
Australia is heavily reliant on mining exports and the price of iron ore remains depressed well below its Covid peak as our largest trading partner faces the possible impact of a Trump 2.0. Local inflation has fallen to an annual rate of 2.8% in September, down from 3.8% in the previous quarter though underlying inflation was 3.5% which is still slightly above target. The depressed Australian Dollar poses a risk to the RBA further cutting rates; however, the December CPI figures will paint a clearer picture of the economy’s state and the next decision.

Portfolio Positioning
With markets changing their narrative each month and investors sharply reacting to the slightest change in tonality from central banks and governments, it becomes quite difficult to attempt short term tactical shifts. We prefer to focus on a long-term, goal-oriented approach to multi-asset portfolio construction as it allows us to diversify our risk factors to provide a robust portfolio that can weather the cycle.
As we wrap up the year for 2024, the LBP Investment Committee continues to slowly move the portfolio allocations towards the private infrastructure and alternatives asset classes. This shift diversifies the portfolio’s sources of return and income generation, delivering a more robust portfolio outcome and greater resilience to broad market drawdowns. Infrastructure provides strong inflation resilience while offering consistent income generation and improves overall factor diversification. Alternatives provide diversified sources of return that are not correlated with traditional asset classes. These can be found in other private markets such as royalty investments, litigation financing or insurance strategies, or in liquid markets such as through multi-strategy hedge funds, trend following strategies and market-neutral funds.
While our portfolios focus on diversified sources of return to meet specific objectives, we do not neglect to diversify within our listed and private equity allocations. Seeking alternative sources of return that have low correlation to equities is important, however equally so is constructing a robust equity portfolio that captures the full equity risk premium, with some additional alpha.
We approach this portfolio sleeve with a focus on quantitative, systematic strategies that aim to exploit market inefficiencies through deep research on identifying signals that are used as inputs to quantitative models that forecast asset returns. These strategies in listed markets often provide a lower tracking error, with more reliable return outcomes that can be more difficult to achieve with a fundamental selection process (which has its own merits).
In the private equity sector, we seek to diversify exposures across evergreen buyout funds, as well as secondaries funds and even core multi-private asset solutions. Secondaries benefit from shorter duration and a potentially discounted access with enhanced transparency into the underlying portfolio of assets. It can even be used as an income generating asset in portfolios due to the later-stage nature of the underlying companies that more frequently pay out dividends. Thus, even within an equity portfolio allocation, we consider the most efficient ways to extract the equity risk premium, while ensuring good diversification across both public and private markets.
As we enter the new year, we observe a few diverging stories despite the global economy continuing to expand at a solid pace; there is strong growth in the US which is likely to continue with the Trump administration, while China is in the midst of a structural downturn with further drawdown risks amid the threat of tariffs, and the Eurozone is decelerating again after short-lived growth over their summer. As the trend of de-globalisation continues, global growth will remain very uneven through the various regions over the next year, though Oxford Economics’ Business Cycle Indicator shows an aggregate level of stable growth which is promising (Chart 6).
Ultimately, with many economists continuing to make predictions about what will happen in the new year (and many certainly getting it wrong), we prefer to make portfolio decisions based on investment merit and contribution to total risk and return outcomes. Thus, we continue to diversify our factor exposures and seek to provide reliable outcomes through the economic cycle.
Disclaimer:
This information is general in nature and does not take into account your personal circumstances, needs, objectives or financial situation and does not constitute financial advice. Before acting on this information, you should consider its appropriateness in relation to your personal situation. This information is current as at 22/01/2025.
