December Report

Global equity markets declined in December in local currency terms after the strong rally in November which followed the decisive US presidential election. This decline reflected concerns that persistent inflation in the US and other major economies could slow the fall in interest rates. Investor confidence was also dented by rising political uncertainty, after ruling coalitions in Germany and France lost confidence votes in their parliaments. This brings forward the general election in Germany and leaves France with a very fragile government. Meanwhile, moves by parliamentarians to impeach South Korean President Yoon Suk Yeol further impacted market sentiment.

US inflation was unchanged in November at 2.8%, which enabled the Federal Reserve (Fed) to cut interest rates by 0.25% to a range of 4.25% – 4.50% during December. However, Chairman Jerome Powell’s language after the meeting hinted at a potential pause in the current rate-cutting cycle, as inflation remains stubbornly above the Fed’s 2.0% target.

The European Central Bank also reduced its key lending rate by 0.25% to 3.00%, its fourth cut in 2024, as domestic inflation edged down. Meanwhile, the UK’s Bank of England and the Bank of Japan both kept their rates unchanged.

The strongest performing sectors in December were communications services, consumer discretionary and information technology, while materials, real estate and energy were the weakest.

Portfolio Commentary

The Portfolio returned 3.8% in December, while the benchmark delivered 2.7%. Strong stock performance in communications services and industrials and an overweight position in communications services drove relative returns. This was partially offset by weak stock selection and an overweight position in the underperforming healthcare sector.

The largest contributor to relative returns in December was the overweight position in US-based technology giant and Google-owner Alphabet. It outperformed after unveiling a new quantum computing chip, Willow, which solved in five minutes a computing problem that reportedly would take a standard computer more than a trillion years. Additionally, the company released the latest version of its AI digital assistant, Gemini 2.0, which is two times faster than Gemini 1.5.

The Portfolio’s holding in US-based semiconductor and infrastructure developer Broadcom also contributed to relative returns. It outperformed after announcing strong quarterly earnings results and forward guidance. Broadcom expects revenue from custom-made semiconductors supplied to the company’s three existing large data-centre customers to increase to US$60–90 billion in 2027, far exceeding investors’ expectations. Broadcom is a key partner to the hyperscalers—the largest data-centre operators—in building their customised application-specific integrated circuits (ASICs). Investors are only now appreciating Broadcom’s strong market position and consistent free cash flows, although it has been held in the Portfolio since early 2022.

The Portfolio’s largest detractor from relative returns in December was US-based bio-pharmaceutical manufacturer Vertex Pharmaceuticals which develops drugs to treat Cystic Fibrosis. The stock underperformed after announcing that its nonadditive drug for lower back pain had failed to perform better than a placebo in a late-stage trial.

The Portfolio was a long-term investor in US-based semiconductor developer NVIDIA before exiting its position in February 2024 due to valuation concerns. A new position was established in the stock during December. It became clear that it will take longer for emerging competitors to sufficiently narrow the technological gap with NVIDIA’s GPU chips to the extent they pose a threat to its pricing power. This made the valuation level more attractive. The company has also been developing next-generation products that extend beyond chips, including its sophisticated server rack system and development software, CUDA.

The Portfolio exited its position in US-based biopharma equipment supplier Repligen upon concerns for its future earnings growth.