The U.S. Federal Reserve announced a 25-basis point cut to the federal funds rate in December, marking it the third consecutive reduction in 2024 and which brought borrowing costs down to a range of 4.25% – 4.5%, in line with market expectations. The Fed also revised its GDP growth projections upward, now expecting 2.5% growth in 2024 (up from 2%) and 2.1% in 2025 (up from 2%), while maintaining a 2% outlook for 2026.

The U.S. economy grew at an annualized rate of 3.1% in Q3 2024, an improvement over the estimate of 2.8%. Consumer spending accelerated at its fastest pace since Q1 2023, fuelled by a 5.6% rise in goods consumption and robust spending on services. Fixed investment also exceeded expectations, increasing by 2.1% versus a forecasted 1.7%.

However, the manufacturing sector face numerous headwinds with the U.S. Manufacturing PMI dropping to 48.3 from 49.7 in November, well short of market expectations and signalling persistent contraction. New orders continued to decline, pushing production to its lowest level since August 2009, excluding the pandemic disruptions of Q2 2020. In contrast, the U.S. Services sector delivered a positive surprise with the Services PMI climbing to 58.5 from 56.1 in November, reflecting the strongest growth in over two years.  This was driven by rising new orders and improved confidence tied to expectations of business-friendly policies under the Trump administration.

In the Eurozone, Q3 2024 GDP expanded by 0.4% compared to the previous quarter. However, the manufacturing sector continued to struggle, with the Manufacturing PMI remaining unchanged in December. This marks two years of consecutive monthly contractions, driven by a sustained decline in new orders and the steepest output reductions since 2023.

On a positive note, the Eurozone services sector also showed resilience, with the Services PMI rising to 51.4 in December from 49.5 in November. This unexpected recovery marked a return to expansion, supported by improving optimism about the 12-month outlook for output.

In the UK. the economy remained subdued, with GDP growth stalling in Q3 2024. Revised data showed no growth, down from an initial estimate of 0.1%. The UK Services PMI improved to 51.4 in December from a 13-month low of 50.8 in November, exceeding expectations. This reflected modest growth driven by increased business activity and reduced backlogs. However, service providers expressed concerns about rising costs, including higher National Insurance contributions, which weighed on sentiment and expansion plans.

The UK manufacturing sector saw further decline, with the Manufacturing PMI falling to 47.3 from 48 in November, marking the sharpest contraction in 11 months. Production dropped for the second consecutive month as new orders declined at an accelerated rate.

In December, global equity markets saw a mixed performance. The MSCI World Index fell by 2.69%, as did the S&P 500, declining by 2.50%. The Nasdaq bucked the trend, increasing by 0.48%. In the UK, the FTSE 100 fell by 1.38% while the broader market as represented by the FTSE250 declining by 0.57%. The smaller companies were mixed with the Small Cap Index rising 0.61%, the Fledgling Index up 1.87% while the AIM All-Share Index struggled and was down by 1.76%.

Our portfolio’s net asset value (NAV) decreased by 0.75%. Notable contributors to performance included Raspberry Pi, Treatt, Wise, and Alpha Group, each gaining over 5% during the month. Impax Asset Management was the largest detractor to performance, impacted by the loss of a large mandate. We reduced our holdings in Gamma Communications and increased our position in AJ Bell. At month-end, cash holdings comprised 2.5% of the portfolio.