Recalibration, Looking forward + forecasting 2025 + MORE!

What happened this week?

The Federal Reserve cut its policy rate by 25bps on Wednesday, as widely expected, taking the midpoint of the target range to 4.375%. The decision was not unanimous, as 4 participants were not in favour of the decision. Powell said, however: “From here, it’s a new phase, and we’re going to be cautious about further cuts,” suggesting the official cost of money is closing in on the neutral rate.

There is one word to use as investors enter 2025: uncertainty. Of course, investing risk and uncertainty are always present within the financial markets, but the breadth of uncertainty seems much larger than normal.

The Bible story of the virgin birth is at the center of much of the holiday cheer this time of year. ?The book of Luke tells us that Mary and Joseph traveled to Bethlehem because Caesar Augustus decreed a census should be taken. ?Mary gave birth after arriving in Bethlehem and placed baby Jesus in a manger because there was “no room for them in the inn.”

It’s that time of year when Wall Street polishes up its crystal balls and predicts next year’s market returns. Since Wall Street never predicts a down year, these forecasts are often wrong and sometimes very wrong. For example, on December 7th, 2021, we wrote an article about the predictions for 2022.

KKR’s 2025 Investment and Economic Outlook serves as a measured yet optimistic guide for navigating the global economy’s shifting sands. Amid the challenges of geopolitical tensions, structural inflation, and a fragile recovery, KKR’s framework underscores the enduring opportunities for investors who can adapt to the new regime. As Henry McVey, KKR’s Head of Global Macro & Asset Allocation, emphasizes, “While the bar is undoubtedly higher, we remain positive on risk assets again in 2025 for several reasons.”

Over the last decade, U.S. large cap growth stocks have been far and away the best performing major financial asset in the world. However, as most good contrarians know, the most attractive prospective investment opportunities rarely come from past winners, especially when they have been of this magnitude. In this piece we consider three notable relative equity market underperformers during U.S. growth’s triumphant run: U.S. value, U.S. small, and China. Specifically, we share four avenues of analysis we recommend for differentiating between those assets which are poised to rebound and those which are in danger of continuing to disappoint...

Top Performing

1. uniQure N.V. (QURE): This biotechnology company experienced a significant increase of approximately ▲108% over the week, attributed to positive developments in their gene therapy treatments.
2. Reviva Pharmaceuticals Holdings Inc. (RVPH): Specializing in therapies for central nervous system disorders, Reviva Pharmaceuticals saw its stock rise by about ▲66% this week, likely due to favorable clinical trial results.
3. Procaps Group S.A. (PROC): A pharmaceutical company focusing on advanced drug delivery technologies, Procaps Group's stock increased by approximately ▲61% over the week, possibly due to strong quarterly earnings.
4. Rigetti Computing Inc. (RGTI): A quantum computing firm, Rigetti Computing's stock rose by approximately ▲44% over the week, likely due to advancements in their technology and strategic partnerships.
5. SoundHound AI, Inc. (SOUN): An AI company specializing in voice recognition and natural language processing, SoundHound AI's stock surged by about ▲36% this week, potentially driven by new product launches or partnerships.

Bottom Performing

1. Digital Brands Group Inc. (DBGI): This apparel company's stock declined by approximately ▼47.4% over the week, possibly due to disappointing earnings or operational challenges.
2. Corvus Pharmaceuticals Inc. (CRVS): A clinical-stage biopharmaceutical company, Corvus Pharmaceuticals saw its stock decrease by about ▼33.7% this week, potentially influenced by unfavorable clinical trial results or funding issues.
3. Cardiff Oncology Inc. (CRDF): Specializing in cancer therapies, Cardiff Oncology's stock dropped by approximately ▼26.7% over the week, which may be related to setbacks in drug development or market competition.
4. Lamb Weston Holdings Inc. (LW): A producer of frozen potato products, Lamb Weston's stock fell by about ▼22.6% this week, possibly due to supply chain disruptions or decreased demand.
5. Traeger Inc. (COOK): Known for its wood pellet grills, Traeger Inc. experienced a stock decline of approximately ▼17.9% over the week, potentially due to lower consumer spending or increased competition.

Regulatory Oversight and Compliance

• Vanguard's Agreement with the FDIC: Vanguard has consented to increased regulatory oversight by the Federal Deposit Insurance Corporation (FDIC) due to its substantial investments in U.S. banks. This arrangement permits Vanguard's funds to maintain significant holdings in numerous banks while enhancing the FDIC's supervisory authority over the asset manager. The agreement includes filing passivity commitments when ownership exceeds 10% in FDIC-supervised banks, ensuring Vanguard does not influence bank operations.
• House Judiciary Committee's Inquiry into ESG Practices: The House Judiciary Committee has intensified scrutiny on U.S. asset managers involved in the Net Zero Asset Managers initiative, which commits to achieving net-zero emissions by 2050. Letters were sent to 60 firms, including BlackRock and State Street, questioning their roles in what the committee refers to as a "woke ESG cartel." The inquiry suggests that these climate-focused strategies could potentially violate U.S. antitrust laws.

Industry Leadership Changes

• Asset Management CEO Transitions: The asset management sector has witnessed significant leadership changes. Dame Anne Richards stepped down as CEO of Fidelity International, with Keith Metters assuming the role of president. Schroders' CEO Peter Harrison retired, succeeded by CFO Richard Oldfield. Additionally, Vanguard appointed Salim Ramji from BlackRock to succeed Tim Buckley as CEO. These transitions reflect ongoing adaptations to competitive pressures and strategic priorities within the industry.

Market Performance and Investor Sentiment

• Underperformance of Institutional Favorites: In 2024, the S&P 500 index achieved a 26% return, significantly outperforming assets favored by top money managers. Investments such as healthcare, Japanese, and emerging-market stocks yielded lower single-digit returns, trailing behind the S&P 500. Conversely, sectors like banking and consumer discretionary stocks, which were less favored, experienced substantial gains.

Strategic Initiatives and Technological Integration

• JPMorgan Chase's Enhancement of Online Brokerage Services: JPMorgan Chase is enhancing its self-directed online brokerage offering by adding fractional shares and trust accounts, targeting its existing banking and wealth management clients. This effort aims to grow their already substantial $100 billion in assets. Additionally, the deployment of artificial intelligence in wealth management is anticipated to significantly increase in 2025, transforming advisory firm operations.

Market Movements

• TSX Futures Slight Decline Post-Holiday: Following a two-day Christmas break, Canada's main stock index futures experienced a slight decline. On Friday, December 27, 2024, March futures on the S&P/TSX index dropped by 0.09% at 6:10 a.m. ET. This movement mirrored trends on Wall Street, where U.S. stock futures also eased after a positive week. Concurrently, gold prices decreased despite being set for weekly gains due to Middle East political uncertainties, while oil prices saw a slight rise, driven by expectations of economic recovery in China and lower U.S. inventories.

Regulatory and Policy Updates

• Bank of Canada's Concerns Over U.S. Tariff Threats: The Bank of Canada has expressed significant concern regarding President-elect Donald Trump's proposed 25% tariff on Canadian imports. Governor Tiff Macklem indicated that such a tariff poses substantial uncertainty for Canada's economy, potentially exacerbating already weak business investment and impacting productivity. In response, the Bank of Canada recently cut interest rates by half a point and signaled the possibility of further cuts if the tariff is enacted. Prime Minister Justin Trudeau has vowed to retaliate if the tariffs are imposed, highlighting the critical risk for Canada, given that over 20% of its GDP relies on trade with the U.S.

Corporate Developments

• National Bank's Acquisition of Canadian Western Bank: National Bank of Canada’s $5-billion takeover of Canadian Western Bank has cleared its final regulatory hurdle. The Montreal-based National Bank announced that the federal finance minister has approved the deal, marking the last milestone in the takeover set to be completed on February 3, 2025. This acquisition is expected to significantly expand National Bank's presence in Western Canada.
• CI Financial's Consideration of U.S. IPO: CI Financial, a Canadian wealth and asset management company, is reconsidering its plans to take its U.S. wealth management business public. After initially pausing its U.S. IPO plans announced in April 2022, CEO Kurt MacAlpine stated that the potential IPO could happen in early to mid-2026, contingent on market conditions. The firm’s U.S. wealth management assets have grown significantly, representing nearly half of CI Financial's C$518 billion in total assets.

Product Launches

• Harvest Portfolios Group's ETF Expansion: Harvest Portfolios Group Inc. is seeking to expand its footprint in Canada’s ETF industry. The firm announced on December 11 that it has filed a preliminary prospectus with Canadian securities regulators for six new ETFs. This includes ETFs focused on companies like MicroStrategy, Coinbase, Palantir, Tesla, and Meta, as well as a diversified high-income shares ETF.

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