Equity Markets
Global equities, as measured by the ACWI Index in USD, declined 1.0% in Q4 and increased 17.5% during CY 2024. In Q4, US large-cap stocks (+2.3%) sharply outperformed international developed and emerging market equities (both down 8.0%). For CY 2024, US large-cap stocks likewise dominated (+24.5%) international developed (+3.8%) and emerging market (+7.5%) equities. For both periods, US equity outperformance was driven by stronger corporate earnings and economic activity and greater exposure to technology and internet themes which benefitted from AI spending. In Q4, US equities also benefitted from shifts in investor sentiment following the 2024 US presidential election (Trump policies perceived as more favorable for US companies), and from currency fluctuations as the USD strengthened materially vs. other currencies, especially in Q4.
Government Bonds and Investment Grade Credit
U.S. government and investment-grade corporate bonds declined in Q4 as bond yields rose sharply. The Barclays US Aggregate Index declined 3.1% for the quarter and appreciated 1.3% for CY 2024.
During Q4, U.S. Treasury yields increased by 70 to 80 basis points across the maturities curve, reflecting a combination of stronger than expected economic data, stalling in the disinflation trajectory, and perceptions regarding potential effects of Trump policies with regards to taxes, immigration, and tariffs.
High-Yield Bonds & Leveraged Loans
US High-yield bonds were relatively flat during Q4 and +8.2% in CY 2024. In Q4, high-yield bond coupon income was offset by declines in prices associated with rising rates. For CY 2024, bonds benefitted from high coupon income and compressing spreads, which were partially offset by rising base rates. High yield bond spreads at 280bps are well lower than historical averages (420bps) and those experienced under recessionary conditions (600bps-800bps). US leveraged loans appreciated by 2.2% during Q4 and 9.1% in CY 2024. For both periods, leveraged loans benefitted from high coupon income (driven by high base rates) and stable prices. With base rates having declined by 100 basis points over the past four months and a further 50 basis points reduction expected by year-end 2025, leveraged loan coupon income will decrease moving forward and lower returns are expected for 2025 and in future years.
Hedge Funds
Hedge funds posted flat performance in Q4 and were up 5.3% for 2024. In 2024, most strategies post positive performance with long-short equity strategies (+7.5%) and convertible arbitrage (+6.8%) delivering the strongest relative performance, while merger arbitrage (-1.8%) underperformed with a difficult regulatory environment for mergers contributing to weaker performance.
Private Equity
Private equity returns rose 3.1% in Q3 and are up 5.9% YTD following a 9.3% gain in 2023. With Q4 data pending due to reporting lags, low-single-digit returns are expected.
Returns in 2024 have lagged public equities, largely due to lower exposure to AI and tech sectors. Additionally, PE managers have been reluctant to mark-up asset valuations during a period of still low exit activity. Q4 deal activity approximated $185bln, slightly below values seen in Q2 and Q3. Entry valuations have remained stable around 12.5x EBITDA (above 2023 trough levels and below the 14x 2021 peaks) while leverage has remained in the low 5x Debt / EBITDA range or roughly 45% of deal value.
Encouragingly, the exit environment has continued to improve from trough levels, with Q4 exit value reaching $126bln, the highest level since Q4 2021 and 60% higher than Q4 2023.
Private Credit
Private Credit (measured by the Cliffwater Direct Lending Index) was up 2.8%
during Q3 2024. Early indications suggest approximately roughly similar returns for Q3. While the outlook remains positive, returns will decline as interest rates fall. Unlevered yields approximate 10% at base rates of 4.3%. Although current credit quality remains solid, the percentage of loans in non-accrual is rising, indicating potential defaults or markdowns in legacy portfolios. Competition is intensifying among private credit lenders, but conditions remain reasonably favourable in the middle market, where spread compression has been less severe.
Private Real Estate
The private real estate market saw a slight rebound in Q3 2024 (latest data available), with the NCREIF Index up 0.8%, marking the first positive quarterly performance over the last six quarters. Signs of stabilization are emerging, as cap rates level off and transaction volumes increase. Operating fundamentals vary by property type: industrial and multi-family rents are flat despite strong demand, while office continues to be pressured with historically high vacancy rates. It remains to be seen what effect the recent rise in long-term interest rates may have on cap-rates and transaction volumes.
Outlook & Portfolio Positioning
Although 2024 saw strong returns across risk assets, we expect that 2025 could bring increased volatility. US economic and immigration policy (and knock-on effects across the globe) is highly uncertain as the Trump administration returns to the White House. Non-US economic growth remained relatively low in 2024 and potential US policies such as enactment of further tariffs could strain nascent recoveries.
Geopolitical risks are heightened, although there is some optimism regarding potential settlements or de-escalations in those crises. With U.S. equity valuations appearing stretched, the potential outcomes for the next 6-12 months are broader than usual, especially for public equities.
We are incorporating these views into our portfolio positioning by:
Extending Duration
Adding Treasury bonds with intermediate maturities (5-10 years), especially with 5-10 year U.S. Treasury yields ranging between 4.5% and 4.7%.
Focusing on Private Investments
Continuing to allocate to new private investment strategies, with a particular emphasis on private equity secondaries and private credit, which offer compelling risk-adjusted return potential in the current environment.
