Knowledge Centre

All in all, 2024 was a resilient and robust year. Multiple elections around the globe; escalation of geopolitical conflicts; the battle against inflation and rising protectionism via potential tariffs; and the use of industrial policy to realign supply chains in favour of domestic companies, ultimately failed to impact returns. Since 2019, the number of trade restrictions implemented by countries tripled from 1,000 to 3,000 and yet stock markets just shrugged them off and likely will in the future. Even issues like population aging and slowing productivity could not dampen investor enthusiasm.

Canada has done surprisingly well in 2024. The Bank of Canada has reduced its key rate five times since June and rates are likely to fall further. However, the timing and pace of further cuts are uncertain, reflecting an unclear economic picture, sluggish productivity and worsening unemployment, which is now at its highest levels since January 2017 (outside of the pandemic). As a result, inflation has faded into the background and fallen into the “who cares” zone. However, because of the Banks actions, there has developed a significant divergence between Canadian and U.S. rates, which coupled with President-elect Trump’s tariff rhetoric pushed the dollar down to levels not seen since 2016 and 2020. Still, economic growth over the next two years is forecasted to be high.

U.S. growth continues to surprise on the upside driven by strong household spending and dissipating inflation. It is poised to outperform unless hefty tariffs drive trade turmoil and stunts growth. It does seems unlikely that the U.S. will impose such tariffs on a broad spectrum of nations and products since the ramifications for the U.S. would be equally as bad. Ultimately the new administration will make changes but until they occur caution, rather than reaction, should be paramount. The labour market remains healthy which has allowed the Federal Reserve to reduce rates at a measured pace and keep the economy bouncing right along.

The European Central Bank cut interest rates four times this year with potentially three more in early 2025 as inflation has been tamed. Unfortunately, to accomplish this feat the economy has taken a beating and sapped economic growth for nearly two years. Despite an exceptionally resilient labour market, France and Germany appear to be dragging Europe into a recession. Inflation in the U.K. has fallen to its lowest level for more than three years, however it remains very sticky. When combined with stagnant growth, an uptick in unemployment, lower spending targets, and new taxes, the country is between a rock and a hard place.

It was a very impressive year for stock markets around the world led by U.S. and Canadian markets. Non-Canadian market returns were enhanced by a decline in the Canadian dollar of 6.6% in the fourth quarter and 9.1% for the year. Canadian stocks climbed 3.8% in the quarter and 21.7% for 2024. U.S. stocks were once again world beaters gaining 9.1% in Q4 and 36.4% year to date (all figures in Canadian dollar terms). International stocks were not as rewarding, falling 2.0% in the last quarter and gaining 13.8% for the year. Emerging Markets followed a similar pattern dropping 1.8% in the fourth quarter but rose 17.9% for the year. Bonds were once again the weakest asset class as they were flat in the last quarter and eked out a 4.2% return in 2024.

Investors will need to be nimble in the coming year as it has the potential to be either spectacular or a dud. While interest rates cuts, immigration policy, employment within Canada and global uncertainty remain key variables, unsurprisingly it is tariffs that are top of mind. While initial proclamations are provocative and can work, the reality is that tariffs are a two way street such that implementing policies that could trigger a spike in U.S. inflation or a major stock market downturn are barometers of failure that the incoming U.S. president will definitely want to avoid.

The fourth quarter saw an improvement in the gloomy job market of the last several months as September’s job report defied expectations with more than 46,000 new jobs, decreasing the unemployment rate. This improvement followed four consecutive months of dismal job reports although the overall trend points to a continued volatile job market as well as a higher unemployment over the long term. Population growth has been the main factor keeping unemployment high as the September labour Force Survey reported that on a year over year basis, employment was up 1.5% while the population aged 15 and older grew 3.6%. The economy expanded 1.00% in the third quarter on an annualized basis, following 1.5% growth in the previous quarter, below the Bank of Canadas (BoCs) projection.

In a sluggish business climate on the backdrop of falling inflation, the BoC deployed a sledgehammer with back to back 50 point rate cuts in November and December. The S&P / TSX exhibited a completely different picture to the soggy economy and emerged as one of the best performing global indices in 2024, with a 3.8% gain in the fourth quarter and 21.7% year to date.

Quarterly performance has been broad-based and technology stocks led the charge with a 17.4% gain over the quarter, followed by Financials at 5.7%. Growing demand for transformative technologies such as artificial intelligence (AI) continues to drive tech stocks higher. For 2024, tech stocks have added an impressive 32.5% to the index. Financials, banks in particular, found some relief in December as the financial regulator OSFI (Office of the Superintendent of Financial Institutions) determined that bank stability buffers remain unchanged; in other words, there is no need for additional capital. That positive development on bank systemic risk followed staggering $3.5 billion loan loss provisions recorded in the second quarter. Telecommunications, Health Care and Materials were the main quarterly detractors, returning -17.7%, -6.1% and -5.1% respectively. There has been mounting competition in the telecommunication sector over the last few years and the so-called Big 3 (Rogers, BCE and Telus Corp.) have seen a slight decrease in their revenue per user. These players also made huge capital investment through debt to roll out their 5G networks. However, the expectation that the payback from these investments would just be around the corner hasn’t really come to pass. Materials, notably gold, have been on a rampage with record prices in 2024 although it hit a setback in November through December when the Federal Reserve indicated decreased monetary easing moving forward. For 2024 the sector is still a standout with 19.3% gain.

The BoC has fast tracked to neutral policy over the past few months with five consecutive rate cuts since June, including two big back to back 50 basis point cuts. This has put it into a leadership position among all advanced economies for quick policy normalization. These efforts appear to be effective in addressing the BoC’s price stabilization mandate as headline inflation ticked down to 1.9% in November, below its 2% target. The near term outlook heading into 2025 is clouded by potential 25% tariffs from the incoming Trump administration, a move that can reignite price pressures and increase recessionary risks. But the housing segment has started to show positive signs. CREA (The Canadian Real Estate Association) reported that home sales jumped 26% year over year as of November and activities are expected to increase with further rate cuts.

For Canadian investors who saw the S&P/TSX get off to a slow start but closed the year amongst the leading global indices, there is reason to brace for continued momentum. Particularly as interest rates continue to fall and the yield curve inversion reverses – a favorable environment to some of the key segments of the S&P / TSX.

The Canadian Bond market was flat for the quarter but gained 4.2% during 2024, the second consecutive calendar year for positive bond performance. Certainly, a relief for bond investors who for the first time witnessed back-to-back years of negative returns in 2021 and 2022. Within Fixed Income, Corporate Bonds outperformed the rest of the sectors and along the yield curve, shorter duration bonds outperformed both longer duration bonds and the bond universe. There was a bear steepening of the yield curve in the fourth quarter, meaning that rates increased, more so on the long end than the short end. The yield on the benchmark 10-year Government of Canada bond increased. The Canadian Dollar weakened to 1.44 / USD, approaching January 2016 lows.

Political uncertainly is the main driver behind the weakening dollar. The U.S. Presidential election which took place on November 4th saw Donald Trump get elected as the forty-seventh president. Similar to 2016, Trump’s campaign ran a pro growth agenda of lowering corporate taxes and deregulating industries to ultimately boost profits and brighten earnings outlooks.

In the immediate aftermath of the election, risk on assets such as high beta stocks and crypto currencies rallied while risk off assets like bonds and treasuries took a hit. This is what happened the first time Donald Trump was elected, followed by the threats of tariffs and a trade war. This time around however, the threats came in with more vigour. The incoming administration stated that they are willing to declare a national economic emergency to justify sweeping tariffs of 25% on America’s neighbours, raising fears of lower demand for Canadian products. In Canada unemployment rose to 6.8% in November, a slight uptick from the previous quarter and a full percent above November 2023. The labour force participation rate ticked higher through the quarter as more people are looking for work to help cope with inflation.

The Bank of Canada (BoC) continues to be active in its fight against inflation and a sluggish business climate with back-to-back 50 basis point cuts in November and December. This would make Canadian policymakers the most aggressive among advanced economies. The rhetoric from the BoC suggested that there will be no more aggressive cuts in the next year and borrowing costs are due to be lowered should their base case hold. The rate cuts came on the back of news that Canadian GDP grew at an annualized pace of 1% over the third quarter. Consumer spending drove growth over the quarter but was offset by lower business investment. The Canadian prime rate sits at 5.45%, equal to its level in September 2022.

South of the border, the Federal Reserve cut interest rates for the third consecutive meeting, bringing its level down to its early 2023 range of 4.25% – 4.5%. Although the U.S. economy continues to surprise to the upside, investors still need to be wary of inflation. Donald Trump’s policies of tax cuts and tariffs could rekindle the spike in inflation. This loose fiscal policy will need to be met with spending cuts for balance thus leading to questions if bondholders will require higher yields in turn.

Moving forward, bonds remain a crucial part of a balanced portfolio, but the outlook is uncertain. The Canadian economy is expected to improve but there is a looming threat of Canada being pulled into a trade war mixed with political uncertainty. Canada has had and dealt with these threats before. Amongst the ongoing political and economic turmoil, as always, opportunities continue to present themselves to investors who are disciplined, patient and forward looking.

Capping off a very strong year, U.S. equities returned a muted 2.4% in the fourth quarter, bringing its 2024 return to 25.0%. Information Technology, Communication Services, Consumer Discretionary and Financials all returned over 28% in 2024 and these sectors also led the fourth quarter. Growth oriented stocks outperformed value. Globally, U.S. equities have led the way through 2024 and the years final quarter marks the fifth consecutive quarter of positive returns for the index.

The Presidential election, which took place on November 4, 2024, saw Donald Trump retake the presidency resulting in a strong Technology rally for through the end of the year. This is very reminiscent of the market’s initial reaction when he was elected for the first time in 2016. Similar to then, Trumps campaign ran a pro growth agenda of lowering corporate taxes and deregulating industries to ultimately boost profits and brighten earnings outlooks. Although voters seemingly believe the conventional thinking is that Republicans are “better for the markets” because they tend to push for more pro business policies, the reality is that the U.S. stock market is a global leader and has returned more than 20% for the second straight calendar year.

As the global economy grapples with high inflation, the promises of economic prosperity resonated with voters who endured an annual inflation rate of over 4% (which peaked at over 9%) for over two years. In the second half of 2024 there have been signs of real improvement although inflation is still above the Federal Reserves’ 2% target. Still, Americans are frustrated with the price of goods and are looking for answers. The Republican party understood this frustration and homed in on it to win the election. The incoming campaign concocted a new department dubbed the “Department of Government Efficiency” and parroted the term “Drill Baby Drill” in reference to pulling back regulations and drilling for oil to combat energy inflation. This type of “America First” rhetoric ultimately won the day.

Unemployment is back to pre Covid levels and in the previous quarter, the government reported that the economy expanded at a very solid pace with an annualized growth rate of 3%. Although the annual inflation rate did tick up in the quarter, it’s important to understand that this is a rolling calculation and the rate spike is due to the low inflation reading from last year dropping out of the equation. Despite this, voters would still give the economy a poor grade due to the cumulative rise in prices over the past few years.

The Federal Reserve also sees an improving and strong American economy as they cut the borrowing rate to a range of 4.25%-4.5%, which brings the rate down to where it was in December 2022, when rates were moving in the opposite direction. The Fed signalled that it would likely lower the rate twice more in 2025, a sign that their confidence in taming inflation is increasing. Trade has an enormous impact on the price of goods and the incoming administration has promised tariffs across the board, raising fears that a trade war could be on the horizon. Trade partners to the U.S. faced similar threats in 2016 without an actual trade war kicking off and that would be a welcomed result again this time around as a trade war wouldn’t benefit anyone in the long run. It’s important to not dismiss this possibility entirely however and a set of new, heavy tariffs would dampen growth prospects and setback markets.

As mentioned in our October Monthly Insight, both good and bad stock market performance in the year before or after a U.S. presidential election likely has less to do with the president’s party and more to do with what’s occurring in the economy. The current economy is strong and in many ways still recovering from its 2020 lows. A requirement for the S&P500 to continue its winning streak is a broadening of market returns. The Magnificent Seven has frankly dominated the S&P500 over the past decade, leading to rather high valuations. Widening the breadth of performance would be very healthy and could certainly extend the index’s stellar run.

Equities have had an extraordinary run in 2024 but unfortunately international returns did not match the peerless performance of U.S. stocks. International stocks were simply not as rewarding mainly due to the fear of tariffs. The constant threat of geopolitical upheaval; escalating conflicts and now the increasing fears of a tit-for-tat global tariff war could not offset the apparent victory over inflation and declining interest rates. Many currencies of major U.S. trading partners have been hit hard in the past few months by tariff worries and stock markets have followed them lower.

Everyone is gloomy on Europe. The euro has fallen to one year lows, reviving talk the currency could hit parity with the U.S. dollar. Although, inflation worries have largely disappeared, anemic economic growth has become a bigger concern. The European Central Bank has cut interest rates four times already this year and investors are betting on even more easing in 2025. However, the potential game changer effect of President-elect Trump’s vow to hit the European Union with blanket tariffs of up to 20% could wreak havoc on Europe’s export-dependent economy virtually overnight. It could easily push the region into a deep recession, stoke inflation, prevent interest rates from falling; and further stomp on the currency; piling pressure on consumers who can use their vote as a weapon.

The Bank of England cut interest rates twice last year but has indicated it will move only gradually with future cuts despite signs that Britain’s economy is losing momentum. As the new government’s first budget will lead to increases in tax, spending and borrowing to generate economic growth, it will also likely lead to higher inflation. Possible new sweeping U.S. tariffs could mean that interest rate policies are loosened more modestly than many anticipated. So, interest rates might stay elevated for longer.

Japan has racked up trade deficits for four straight months as a weak yen and rising energy prices have kept import costs high, which is causing the rate of inflation to rise. The currency is down almost 9% in 2024 against the U.S. dollar. The recent fall in overseas demand is believed to be partly due to temporary disruptions like Typhoon Shanshan, while the drop in exports is related to local auto production disruptions. Given exports are a chief engine of growth for Japan any universally applied tariffs could become just another worry.

The non-North American stock performance picture is remarkably consistent: great returns before the U.S. tariff threats; and ugly results afterwards. In other words, negative fourth quarter returns dragged down the full year performance. Overall, international stocks dropped 8.0% in the last quarter of 2024 and gained a meager 4.4% for the year (all figures in U.S. dollar terms). European stocks fell 9.7% in Q4 and eked out only 2.4% for the year. U.K. stocks dipped 6.8% in the last quarter but did manage to gain 7.6% for the year. Similarly, Japanese stocks fell 3.6% in the fourth quarter but were able to finish 2024 up 8.7%.

Mixed stock market results in 2024 do not foreshadow a correction just as it does not mean that stellar returns will result. Stocks follow their own path as conditions warrant. The most obvious threat is the rhetoric coming out of the U.S.. However, if tariffs are used sparingly, or not at all, then central banks around the world would have the freedom to pursue economic stabilization policies. Removing that threat would enable global markets to rally further. Such an outcome could occur and bearing this in mind will be the key to navigating 2025.

Regardless of where emerging market economies are in terms of growth rates, inflation levels and fiscal health, they are likely to face a difficult journey ahead. Slower growth and frail currencies are expected amid relatively weaker fiscal and monetary support initiatives. The risks that adverse geopolitical events pose to conditions are not as severe as they were at the start of 2024 but containing conflicts and ensuring they do not escalate remains paramount.

Emerging market financial conditions are the tightest in some time based on the potential negative impact of new policies coming out of the U.S. which have caused interest rates to rise as countries try to defend their currencies. Emerging market countries collectively hold $10 trillion in U.S. dollar denominated debt. While external debt in Asia has mostly plateaued in recent years, foreign liabilities have continued to rise in the Americas, Europe, and Africa. So, falling currencies means that meeting the interest payment obligations are much harder. Governments can dip into U.S. dollar cash reserves but just like other currency depreciation victims such as Hungary, Chile, Poland, and Czech Republic (the top external debtors’ countries), the cost of payments could be crippling.

China continues to implement measures to reinvigorate its economy after a period of sluggishness.. Weakness in the property sector remains a major drag on growth as people whose houses have lost value will remain reluctant to spend much. A benefit of the lack of spending is that inflation remains low. Exports are one of the economy’s bright spots this year but the outlook is dimming amid potential tariff wars with the U.S. as they have threatened tariffs of 60% or more on Chinese goods. The central bank loosened restrictions on borrowing and is now helping local governments refinance their mountains of hidden debt as the bank shifts its focus towards stimulating consumption. China can afford to do this as its national debt-to-GDP level is about 68%, compared with Japan’s 250% and 120% in the U.S.

A strong U.S. dollar poses significant challenges for emerging nations as shown by what’s happening with Brazil. It has substantially higher interest rates as it seeks to get its fiscal house in order. Brazil’s reluctance to cut spending is a key cause of the currency’s slump and the central bank’s staggering tightening. The Brazilian real has lost more than 20% of its value this year and 12% of that was in the past three months. The U.S. is casting a large shadow over many emerging market economies due to its proposed tariff and trade policies. These issues are exacerbating the impact of recent local government crises and contributing to the fall of currencies as the South Korean won has dropped to its lowest in 15 years and India’s rupee has hit a record low.

Emerging market stocks had been doing very well this year until the very noisy fourth quarter. Overall, performance fell 7.8% in the quarter which dragged down the year to date results to 8.1% (all figures in U.S. dollar terms). Asian stocks were the most rewarding but they still dropped 7.7% in Q4. Despite this they still gained 12.6% for the year while China climbed 19.7%. Emerging European stocks fell 6.5% in the last quarter and eked out a 5.7% return for the year. Latin American stocks were crushed in the fourth quarter losing 15.7% and returning -26.0% in 2024. Brazil was the worst performing stock market in the world last year crumbling to a -29.5% return.

2024 was a major election year and a punishing one for incumbent governments. Voters expressed frustration, most notably about the higher cost of living. The desire for political and economic change could remain driving forces in 2025. Emerging Markets have become more volatile recently due to data surprises with even traditionally stable assets having outsized reactions. Even though persistent inflationary pressures which had fueled rising geopolitical fragmentation have diminished, there are still more than enough issues to keep investors on their toes.

The Canadian Real Estate Investment Trust (REIT) sector has significantly lagged the broader equity market in the last quarter of 2024 with a 14.7% loss compared to a 3.8% gain for the S&P / TSX. Year to date the S&P / TSX REIT index closed at -2.0% versus a 21.7% gain for the S&P / TSX. Fourth quarter results were a reverse of Q3 when REITs outpaced the S&P / TSX by double digits on the backdrop of the Bank of Canada’s monetary policy easing. With a 2024 gain of 13.4% (in Canadian dollar terms), global REITs (MSCI Global REIT Index) easily outperformed the Canadian REIT market. Historically, REITs tend to thrive when monetary policy is easing. However, Canadian REIT investors have been cautious as longer-term yields have jumped substantially over the last few months even amid falling shorter term rates. Also, there are concerns over the federal government decision to scale back immigration targets by 20%, removing a key tailwind for the REIT sector.

The Canadian office segment has been showing signs of life in the last few months. The Federal government’s return to work mandate for employees has improved downtown vacancy in major cities. Toronto, for instance, has seen a return of almost 80% of downtown workers on peak days, a trend that should pave the way for recovery. Other global markets such as the U.S., have also seen improvement in office attendance although still below pre-pandemic levels. The office sector recovery in the US is occurring swiftly, driven by cheap valuations and falling yields. Since last spring, the U.S. REIT index has outperformed its broader equities counterpart.

The Canadian Retail segment was a standout performer amid supportive supply / demand fundamentals. The segment is experiencing dwindling levels of new construction and high-quality space has become increasingly scarce. Compared to other REIT segments such as the office sector with double digit vacancies nationwide, vacancies in the retail space are at a relatively decent 6% range.

The apartment sector’s strength of the last few years faded significantly in 2024. A CMHC (Canadian Mortgage and Housing Corporation) report in December estimated a 2.2% vacancy rate for purpose-built apartment rentals as of October 2024 compared to a record 1.5% in 2023. According to Rental.ca, the 6.2% year over year rent increase as of August 2024 was the smallest in more than two years. Slower population growth in 2024, the federal government’s shift to curb immigration, and decades of high levels of construction have started to catch up with the apartment sector. However, housing affordability in Canada is far from being solved and long-term fundamentals still favour lower vacancies.

The easing cycle in the global REIT sector spurred a resurgence in transaction activity – a positive sign towards recovery after few years in the back seat. In the US, institutional and individual allocations to the sector have been trending upward with the Industrial activities surging from 13% to 33% over the last decade. In Canada, there are increasing signs that the REIT sector has turned the corner as inflation and borrowing costs revert to normal levels. There has been pent up demand in Canada on the sidelines in the residential segment due to higher borrowing costs, notably with first time home buyers. The federal government’s decision targeting that demographic with 30-year amortizations is a major boost. 2025 is expected to be pivotal for domestic and global REITs despite the recent asynchronous performance across geographies and markets. Though it is unlikely to be a banner year for REITs due to unsettling levels of uncertainty ahead, most REIT valuations have been rightly discounted. As global rates and borrowing costs shift downward, transactions volume and price discovery should increase. Global REIT investors have reasons to exhibit growing confidence that the worst may be over.