December 2024

“I have come to the conclusion that politics are too serious a matter to be left to the politicians.”  Charles de Gaulle

A challenging month for the governments of the large European states as a combination of deteriorating economies, concern over finances and weak leadership upset markets in the run up to year end.  France’s budgetary woes, complicated by the misguided dissolution of parliament in mid-year, the collapse of the hapless governing coalition in Germany and news that the UK registered back-to-back months of negative GDP growth all served to underscore the growing gap to US performance, a theme we’ve alluded to many times this year.  Compounding the challenge, recent US data strength has led to revised rate expectations, higher bond yields and a stronger dollar, which complicates future monetary policy for the ECB and BoE.  None of these issues will miraculously disappear with the simple flipping of the calendar from 24 to 25…

Further, none of these factors stopped central banks from cutting rates (as expected) in December.  The Fed and the ECB both cut 25 bp, but the Fed was more cautious on the outlook for further cuts, prompting bond yields to rise to their highest level of the year, rather ominously for risk markets.   Other than that, it was fairly quiet, and even the fall of the Assad regime in Syria failed to trigger any sustained market volatility.  For the month, the fund’s A shares rose +1.79% and +13.32% for the year with credit contributing +131bps gross in December and equities +74bps.

Looking ahead to 2025, we believe the themes highlighted in the first paragraphs will dominate.  We have ended this year with both equities and credit pricing fairly rosy scenarios, but rising interest rates will create disruption.  To be sure, in the European financials sector we still see significant idiosyncratic opportunities driven by the twin themes of domestic consolidation and capital accretion.  We will begin the year with a focused portfolio and limited outright exposure, to ensure the flexibility to add risk in response to events.  After two bountiful years for the broader markets, 2025 will require a much more cautious approach.