Commentary from the Fund Managers
Efter a strong stock market year in 2023, with increases of +18.9% for the Stockholm Stock Exchange and +19.3% for the world index, 2024 also turned out to be a year of positive development. The Stockholm Stock Exchange rose by 8.7%, while the world index climbed by an impressive +16.9%.
The U.S. stock market performed particularly well, driven by gains in the tech giants and supported by a strong dollar. European stock markets, however, showed somewhat more subdued development. Valuation differences and currency shifts between the U.S. and Europe have created opportunities for more acquisitions and mergers of European companies.
We anticipate continued strong earnings growth in 2025, with profit forecasts having been slightly revised upward in the past month. Dividends to shareholders are expected to reach record levels again this year. At the same time, valuations are particularly attractive among mid-sized and smaller listed companies. Overall, we maintain a positive outlook on the stock market for 2025.
However, geopolitical tensions remain a significant threat to financial markets and the global economy.
Global Economic Outlook
Despite geopolitical uncertainties, global economic growth is expected to remain stable, with annual GDP growth projected at around 3% for the 2025–2026 period. Lower inflation, rising real wages, and declining interest rates are contributing factors to stronger growth. JP Morgan’s global manufacturing PMI decreased slightly in December to 49.6, down from 50.0 in November, where a figure above 50 signals growth.
The U.S. economy continues to perform strongly. During the third quarter of 2024, GDP grew at an annualized rate of 3.1%, exceeding expectations of 2.8%. The manufacturing PMI improved from 48.4 in November to 49.3 in December, while the services sector rose from 52.1 to 54.1. The U.S. labor market remains stable, although a gradual increase in unemployment is expected during 2025.
In Europe, growth remains low. The Eurozone manufacturing PMI fell to 45.2 in November, from 46.0 in October. The German economy also shows weak development, with the IFO Business Climate Index dropping to 85.7 in November from 86.5 in October. However, unemployment remains stable and low at 6.3% in October. Economic growth is expected to gradually increase during 2025–2026, as rate cuts, higher real wages, and a stable labor market support consumption.
Economic Outlook - Sweden
The Swedish economy remains weak but shows some positive signs of improvement. The manufacturing PMI stood at 52.4 in December, indicating continued growth. However, Swedish industry is influenced by developments in the Eurozone. Despite global uncertainties, industrial production plans have reached a new yearly high at 64.4. Household consumption is expected to drive growth, supported by higher real wages, expansive fiscal policies, and declining interest rates.
Fixed Income Market
In December, long-term interest rates rose in both the U.S. and Europe as expectations for future rate cuts were revised downward following central banks' rate announcements during the month. The U.S. 10-year Treasury yield increased from 4.18% to 4.57%, while Germany's 10-year government bond yield rose from 2.09% to 2.36%. Sweden’s equivalent climbed from 1.92% to 2.36%.
The U.S. Federal Reserve (Fed) cut its policy rate by 0.25 percentage points to a range of 4.25–4.50%, as expected. “The Fed has now reduced the policy rate by 1% from its peak, moving toward a more neutral stance. The policy is now significantly less restrictive, allowing the Fed to be more cautious about further rate cuts,” said Fed Chair Jerome Powell during a press conference following the December 19 announcement. Most indications suggest the Fed will leave the rate unchanged in January, with the direction of monetary policy thereafter depending on economic developments in 2025.
The European Central Bank (ECB) also lowered its key interest rate by 0.25 percentage points to 3.0%. ECB President Christine Lagarde noted that this was not the final rate cut in an environment where inflation risks are now better managed. Analysts expect the ECB to lower rates further, possibly reaching 2.0% by 2025.
Sweden's Riksbank reduced its policy rate by 0.25 percentage points to 2.5%, as anticipated. The Riksbank revised its short-term rate trajectory downward compared to September but kept its longer-term outlook unchanged, with an endpoint of 2.25%. “Patience will be key moving forward, and the Riksbank will take a more cautious approach to rate cuts,” said Riksbank Governor Erik Thedéen after the announcement.
Many analysts now expect the Riksbank to continue cutting rates in January or March, with another cut likely in the first half of 2025, potentially bringing the rate down to 2.0%.
Fund Performance
Kavaljer Quality Focus increased by 0.3% in December, bringing the total gain for 2024 to +10.1%. In comparison, the OMX Stockholm All Share Index (Stockholm Stock Exchange) recorded -1.1% for the month and +8.7% for the year.
The fund's top-performing holdings during the month were Pandora, Paradox, and Kitron, while the weakest performers were Proact, Dustin, and Husqvarna.
Changes and Holdings
During the month, the fund increased its holdings in Alleima, Revolution Race, Scandic Hotels, Storytel, and Svedbergs. Conversely, it reduced its positions in Bravida, Byggmax, Inwido, New Wave, Pandora, Securitas, and Thule. The equity allocation stood at 99%.
