2024 delivered another strong stockmarket performance globally, although index performances were largely defined by a small number of stocks with heavy index weights. I'm referring to stocks that are engaged primarily in the field of artificial intelligence, and particularly Nvidia as well as a few others.

 

To clarify, the Nasdaq Composite index, which consists of 60% of technology shares, gained a solid 28,64% in 2024. While the Nasdaq Composite holds 3273 different securities, just the top 5 securities represent a staggering 44% weight of the entire index and the top 10 securities represent just shy of 60% weight of the index. That is an insane level of concentration. Those 10 shares will define the index performance, not so much the remaining 3263 shares.

 

One of those shares is Nvidia which holds 10,47% weight in de Nasdaq Composite, only second to Apple Inc which holds a 12,05% weight. With Nvidia gaining 171% in 2024, it's been driving the index performance all by itself. Other top weights are Apple, Amazon, Tesla, Meta, Alphabet (Google) and Broadcom, all of which gained from 30% up to 108% in 2024. Only Microsoft (9,98% weight) prevented the Nasdaq from gaining even more, adding only 12% gain.

 

On the other hand the Dow Jones Industrial index, which comprises of mostly industrial and financial stocks, gained just 12,88% in 2024 as it didn't enjoy Nvidia's surge (Nvidia joined the Dow Jones only in November, replacing Intel, and holds a much lower weight). Instead the Dow Jones upside was primarily driven by Goldman Sachs, American Express and JP Morgan, none of which had such a strong impact on the overall index performance. Also 12 out of the 30 components or 40% of the Dow Jones components ended the year in minus.

 

A similar picture took place in Europe. While the French CAC40 index ended the year 2,15% in minus, in part due to political uncertainty, the German DAX gained 18,85%. However the performance of the DAX was also heavily skewed and largely dictated by a handful of companies such as its largest component SAP AG (+69%), as well as Rheinmetall (+114%) and Siemens Energy (+320%). Also German banks did well. However, nearly half of the 40 shares of the DAX index, particularly car makers, ended the year in minus. The median performance of the DAX shares was only around 7%, well below its weighted average performance of 18,85%. The Eurostoxx50, representing the largest companies in entire Europe, gained 8,28% in 2024 which, in our view, better represents the actual market performance without the effect of those outliers.

 

Essentially if in 2024 you would not have had a similarly heavy weight in those strong outliers, then you were likely to underperform the indices. However this also works both ways if (/when) those shares start correcting. Fact of the matter is that the concentration of heavy-weight stocks in various indices hasn't been this high in decades, if ever, and one has to wonder how long they can sustain those levels. As fund managers, it is counter-intuitive and even dangerous to apply such concentration on the funds we manage – instead we prefer a well-diversified and balanced portfolio that brings steady growth while limiting downward risk.

 

Looking at macro economics, 2024 unfolded pretty much as expected. Global inflation, after a strong and necessary downward correction in the aftermath of COVID, came closer to both the European Central Bank's (ECB) and Federal Reserve's (FED) target level of 2%, allowing both central banks to ease their interest rates throughout the year. In there latest moves in December, the ECB lowered their rate once again to 3%, and the FED lowered their rate to 4,50%. However core inflation now remained particularly sticky, particularly in the USA where it is still at 3,2%. In the Eurozone it has remained at 2,7% for the past several months.

As as result the FED announced that it may not apply as many interest rates cuts in 2025 as previously expected. This has put the stock markets under pressure recently. Also the election of Donald Trump as the next president of the USA and Republicans taking control of Congress has had a mixed effect. In the immediate aftermath of the election result in November, the markets reacted positively by expectations that Trump's policy programme will lift growth, lower taxes and cut regulation. But now Trump's threats of placing import tariffs on its main trading partners stokes concern that inflation may pick up again, potentially resulting in the FED raising the interest rate again in 2025, rather than reducing it.

 

In terms of GDP growth, US economy remained strong with annualised GDP growth of 3,1% in Q3. Labour market data saw some distortion due to strikes and hurricanes. Non-farm payrolls rose by just 36k in October but this was followed by a 227k gain in November. Overall the US labour market remains remarkably resilient with an unemployment rate at just above 4%.

The Eurozone so far managed to avoid recession with the latest quarterly GDP growth standing at a meager 0,4% despite Germany struggling to stay positive. Although at 6,3%, Eurozone is at the lowest level in decades. Nonetheless the ECB has signaled further interest rate decreases in 2025 to boost growth. As a result the dollar gained against the Euro, particularly in the later months of the year.

 

 

Also Asian markets performed well in 2024 with the Nikkei adding 19,22% while the Yen remained relatively stable against the Euro. Also the Hong Kong Hang Seng index gained 17,67%, boosted by stimulus measures announced in September. However continued trade restrictions and tariff threats continue to keep the Chinese and Hong Kong markets on edge.

At this point we are reducing our exposure to technology stocks a bit and putting more focus on the sectors that currently have more attractive valuations such as energy and pharmaceuticals. After two years of strong stockmarket performance, it's time to take a more cautious approach.

 

Wishing you a happy, healthy and successful New Year from all of us at Primorski skladi.

 

Rudy Marchant
Fund manager Primorski skladi

 

Monthly reports - December 2024