Also repeating 2023, AI optimism saw the Magnificent 7 stocks drive most of the index gains. Headed once again by Nvidia (+179%), they collectively soared 63% and now represent around a third of the S&P 500 and a fifth of the global indices. Their strength helped growth (+24%) outperform value (+11%), large caps (+19%) beat small caps (+8%), and developed markets (+19%) outpace emerging ones (+8%)[1].
The latter produced wide ranging returns with Taiwan and China up strongly, while Korea and Brazil both struggled with political and macroeconomic challenges. Europe (+6%) also lagged due to its relatively small technology sector, sluggish economic growth and the threat of blanket tariffs on companies exporting to the US.
Despite the continued dominance of information technology and communication services, 2024 saw some broadening of sector returns with positive performance from financial services – the top performer in Europe, Japan and China – and industrials, in particular. Elsewhere, healthcare, real estate, energy and materials all struggled.
A mixed 2024
Our funds had a mixed year. I am pleased to report that all bar one delivered positive absolute returns with SKAGEN m2 the exception in what proved to be another lost year for global real estate. 2024 was more challenging in relative terms – perhaps the most difficult since we started out in 1993 – as all of our funds underperformed to varying degrees with much of the ground lost in the final months of the year.
As markets remained driven by a handful of companies, the environment challenged all stock pickers – only a third of active managers across 38 categories were ahead of their benchmarks over 12-months according to the most recent Morningstar analysis[2] – and this is particularly true of value-focused managers like SKAGEN.
However, this does not make it any less disappointing – suffice to say that we are not satisfied with relative performance and the portfolio managers are all working very hard to improve results. You can read their latest thoughts on performance, portfolio activity and the market outlook for their funds in the latest fund reports.
Around half of equity returns globally last year came from valuation expansion and as we enter 2025, multiples are generally above average (the MSCI World index forward P/E rose from 17x to 19x in 2024) or approaching record highs (the forward US market P/E climbed from 20x to 22x). As valuation is the best predictor of long-term returns, this may mean disappointment for investors tracking these indices – the current US price tag has historically been followed by 10-year returns in low single digits. For those with the freedom to invest away from the mainstream, it should create opportunities, particularly if market returns continue to broaden. Emerging market and European equities, for example, trade at highly attractive discounts relative to both historic averages and the US.
Hope for the best, plan for the worst
I believe the year ahead will be one of uncertainty, not least due to the unpredictable nature of the US President-elect. The market mood is increasingly positive with the latest Bank of America Global Fund Manager Survey showing the biggest monthly improvement in sentiment since June 2020. This optimism reflects a healthy global economy and expectations for solid earnings growth in most regions, notably emerging markets and the US where investors hope that Trump’s promises of lower taxes, deregulation and reduced overseas competition will push share prices even higher.
There remain, however, sizeable risks on the horizon. International trade wars provoked by US protectionism could trigger currency instability, recession or heightened geopolitical conflicts at a time of continued fighting in Ukraine and the Middle East. Inflation may take hold again and spark higher interest rates – a new joint-top threat in the aforementioned fund manager survey following Trump’s election victory – which risks a market correction in the US and probably beyond given its two-thirds country weighting in the global index. A more volatile environment means further market gains in 2025 are likely to be bumpier than in recent years, especially considering that global and US stocks have soared by 36% and 43%, respectively, in a little over 14 months[3].
Amid the monetary, fiscal and trade uncertainty of the next few months, a key point to remember is that companies are usually quick to adapt in changing economic conditions. For SKAGEN, our job remains to find the best ones globally – not just in the US – from a risk-reward perspective. Our experience and analysis could be more important than ever in 2025 to separate signal from noise and seize opportunities that come our way from market volatility – I look forward to keeping you updated on our progress.
[1] Source: MSCI for style, size and regional indices in USD.
[2] Morningstar's European Active/Passive Barometer, Midyear 2024.
[3] MSCI ACWI and S&P 500 indices 27/10/2023 – 31/12/2024 in USD.