"From the Pit Floor to the Bully Pulpit"

Global markets posted strong advances in 2024. As we look ahead to next year, the focus of investors shifts from financial fundamentals to domestic and geopolitical concerns. The RBC Investment Committee, in conjunction with our RBC partners, recently completed our quarterly review in which we maintained our current strategic asset allocation.

The global economy continues to be on the mend from inflationary factors However, the coming year will see the impact of changes that have taken place in the political sphere. Higher protectionism, as some political pundits expect, may hinder global domestic product (GDP) growth. This headwind could be offset by the prospect of lower interest rates and fiscal accommodation in the form of tax cuts. Moving forward, the risk of recession across global markets has diminished, but geo-political and domestic political risks remain important factors to consider.

The S&P/TSX Composite Index in Canada posted strong double digit returns through November 2024, slightly trailing the S&P 500’s gain. The financials sector, a significant part of the S&P/TSX, is expected to drive future earnings growth. Meanwhile, energy and materials underperformed due to falling commodity prices, though gold prices have surged on safe-haven demand. The S&P/TSX continues to trade at a meaningful valuation discount to the S&P 500.

The U.S. equity market, represented by the S&P 500 Index appears poised to post a second year of +20% growth, driven by strong earnings growth and slowing inflation. Key contributors included the real estate, financials, health care, and consumer staples sectors, which benefited from lower interest rates and stable earnings and have helped offset some volatility in the technology sector in the third quarter of 2024.

Emerging market returns have lagged those of the developed markets with the disparity widening over the past three years. One might expect this disparity to decrease going forward with the fiscal effects of COVID-19 moderating and the continued, albeit slower, growth of China and India. However, protectionism and ongoing geo-political risks over the coming months may impact emerging markets disproportionately. Especially if the strictest forms of proposed tariffs are enacted by the U.S. government.

Global central banks are finally starting to ease their monetary policies, driving bond yields down and prices up. With inflation getting closer to the 2% target in most economies, investors are expecting central banks to continue lowering rates over the next two years. The question for bond investors going forward will be whether domestic fiscal policy will work in conjunction with, or act in opposition to, central bank monetary policy.