New year, same chat
Maybe it is just me, but it feels as though last year had many different lives. Over half the world’s population voted in an election, the UK and the US received new governments, England lost in the Euros (sorry to bring up that old chestnut), the Olympics happened and it was incredible, some declared it a ‘BRAT summer’, AI was still a hot investment trend, and Moo Deng stole our hearts.
As memorable as the summer was, we did see the unwinding of the Japanese yen carry trade causing significant market moves. The Japanese market increased 20% over 2024 despite the large dip in August. Around the world most central banks were cutting interest rates, but Japan was increasing rates for the first time in 18 years, and this is something which may very well continue in 2025. Albeit a very modest increase. We still have the same view on Japan as in the summer, it is attractive on a valuation basis.
The US election was a close one, and captured the attention around the world as it had implications globally. There are a lot of eyes on the US stock market, maybe rightly so but I should highlight that China, Europe ex-UK, and the UK are all still trading at a large discount to the US market and the gaps are still widening. So, valuations are very attractive in these markets. There is a potential for upside vs the US if central bank policies and government policies become more favourable. To add to this forecasts for real GDP growth in these regions are positive compared to forecasts for the US going into 2025.
The UK especially has attractive opportunities, government policies presented in the Autumn budget particularly help growth during 2025 and into 2026. The budget saw an increase in public investment which will likely help productively growth. The OBR estimated the budget will lead to 2% growth in 2025 and 1.8% in 2026.
The US market has performed incredibly well in 2024, but was it actually just the top 7 stocks? At the beginning of the year the top 7 stocks were 28% of the index and at the end of the year they were 33.5%. The S&P 500 market cap delivered 25%, almost double the S&P 500 equal weighted index, which delivered 13%, showing the market is still substantially driven by a narrow concentration of stocks.
There have been some bums on the edge of the seat for a while about AI stocks and their ability to deliver results, and I guess that has come with us into the new year. AI has huge potential, but I don’t think we will see productivity benefits for some time (3-5 years earliest probably).
Although the Mag 7 continue to dominate both the market and headlines, there are still pockets of value in other parts of the market. We were positive on the US last year but areas more in the value space and in the SMID part of the market. US earnings growth has been defying odds over the past decade, but for this positive share price run to continue, it will be a monumental task or will require even higher valuations. Stretched valuations also pose a risk and this is where monetary and fiscal policies will become very important in 2025, momentum can only take you so far.
In 2024 we saw a shift into a monetary easing cycle in developed markets. It is widely expected that interest rates will continue to fall but will remain higher on average than they have done over the past decade. Further cuts from the Fed, the BoE, and the ECB are expected in 2025 but nowhere near the low rates the market was accustomed to in the 2010s. This is favourable for fixed income assets, so bonds remaining a key part of a multi-asset portfolio is still our thinking.
During the previous year, we were positive on the higher grade areas of the bond market as we felt high yield spreads continued to be too tight and there was better risk-return in the investment grade and sovereign debt space. Higher starting yields can mean good positive total returns for long term investors. The risks to bonds are the same as equities which is the risk of higher inflation coming back.
With the potential for an AI stock bubble burst there are a few areas of the market this could benefit. Gold is one of them. Gold has done particularly well over the past few years, increasing over 27% in 2024, gold miners have done less well but still rose by a fair 9% last year. This was mostly driven by central banks increasing their reserves and more investors having a gold position in their portfolios.
There is caution going into 2025, but as I’ve highlighted above there are many opportunities. We hope a well-rounded portfolio will take advantage of these.
Emily Cave – Research Analyst
FPC25242
All charts and data sourced from FactSet
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