Global equities and bonds declined in December. The US Federal Reserve’s (Fed) decision to cut interest rates by 25 basis points (bp) was viewed more hawkishly as the Fed suggested there would only be two rate cuts in 2025, which is lower than consensus prior to their December meeting. US Core PCE, the Fed’s preferred measure of inflation, sits at 2.8% year-on-year. Yields on the US 10-year went higher, closing at 4.57% to end the month, as investors adjusted to changing inflation and fiscal expectations.
Equities fell across key developed regions, UK (-1.5%), US (-1.1%), and Europe (-0.7%). In the UK, the Bank of England held rates steady, with a path towards easing as the economy showed signs of falling employer confidence and a weak growth outlook. In Europe, the European Central Bank cut rates in December amid slowing economic activity. The difference between the French and German 10-year government bond yields hit its widest point since the Euro crisis when the French PM Michel Barnier was ousted in a no-confidence vote. Japan (+1.0%) delivered positive performance as the Bank of Japan elected not to raise rates given uncertainty over the future US administration’s economic plans. Chinese stocks (3.8%) were boosted by government officials suggesting a “moderately loose” strategy for monetary policy in 2025.
The overweight position in Broadcom (+45.5%), which designs, develops, and supplies semiconductor and infrastructure software solutions, was the largest contributor to excess returns in the Trust over December. The shares surged after the company released its Q4 earnings with strong performance on key metrics. AI revenue is up by 220% from the previous year. Another stock that was a strong performer for the Trust as a beneficiary of the AI theme was TSMC (+8.9%), which manufactures and markets integrated circuits. TSMC is considered a bellwether for the wider sector, with strong gross margins and robust demand for its AI hardware.
The Trust’s underweight position in Apple (+7.1%) and Tesla (+18.7%) were the largest detractors from our relative return on the month. Apple’s return was driven by expectations around the iPhone 16 and integration of AI into its services. Tesla’s strong returns this year have come mostly in the latter part of the year, buoyed by Trump’s election win. Investors are hoping that self-driving vehicles will be rolled out soon, with the new Administration simplifying the regulatory path.
We ended the month at a discount of 8.7%, widening from 8.1% in November. Net gearing continued to be conservative at 5.0% (with debt at fair value) for month-end.