If you are involved in financial advising or fund management, the month or two around year-end becomes a frenzied blur of reporting on portfolio performances and forecasting asset class returns for the coming period. As a journalist, your inbox bulges with invites to ‘2024 review’ and ‘outlook for 2025’ in-person events and webinars.
A feeding frenzy of outlooks and reviews
The financial media gorges on these forward-looking market predictions despite the myriad disclaimers that ‘the past does not hint at the future,’ seeking to one-up their competitors on all-important measures like clicks, scroll depth and time spent on page. Yes, dear reader, it is all a competition. To secure his place in the rankings, your writer attended the Schroders Crystal Ball 2025 Investment Outlook event, held towards the end of November 2024. The asset manager kicked off proceedings with a basic ‘lay of the land’ as an uncertain and volatile 2024 neared an end.
“This year has been defined by significant macroeconomic and political uncertainty; but 2025 appears no less challenging as global tensions remain, and major economies [face] significant debt issues,” said the event host, before introducing the investment management experts who would share their views. Schroders’ Group Chief Investment Officer (CIO) Johanna Kyrklund was tasked with giving a global investment perspective for the group’s public market business, followed by Nils Rode, CIO at Schroders Capital, who had been asked to dive into private market opportunities.
Beginning with everyone’s favourite return enhancer, global equities, the opening question dealt with whether this asset class could carry its 2024 outperformance into 2025. “If we consider the outlook from an economic perspective, the environment is still quite benign,” said Kyrklund, hinting at another strong year for listed shares. The main underpin for this view is that global investors are responding to improvements in inflation and interest rates by seeking returns further up the risk curve, which generally means shifting away from bonds and cash into commodities and equities.
Full-blown versus limited Trump
The world’s largest economy will continue on its ‘soft landing’ path. “This year, we have been in what is called the slowdown phase; crucially, going into 2025 our expectation is that the US will move back into expansion,” Kyrklund said. Commenting on inflation, the CIO said any escalation in the Middle East conflict could introduce stagflation (low growth and high inflation), whereas a fiscal crisis, US recession or ‘full-blown’ Trump administration would prove deflationary. PS, ‘full-blown’ refers to aggressive, protectionist interventions in international trade through tariffs and other regulations.
Under a scenario where Trump focuses on corporate tax cuts and deregulation, the asset manager expects a reflationary effect that will be quite positive for equity markets. So, what does all this mean for markets in 2025? “Equity is still the main source of returns; a soft landing [in the US] is quite benign for markets, and rates coming down will also help valuations,” Kyrklund said. However, investors will have to proceed cautiously due to valuations on the US S&P 500 index “looking very stretched” at present. The Group CIO noted much of the good news was already baked into share prices and that 2024 returns had been driven by a small number of stocks.
FAnews readers and followers of this Stokes Media opinion feed should already know the Magnificent Seven shares off by heart. The basket consisting of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla has powered US indices to unprecedented highs, delivering an average return of 111% in 2023 and over 58% year-to-date in 2024. We asked Schroders whether this ‘return fest’ might continue. “The Magnificent Seven was very much a story for 2023, and even though this year has been a bit subdued, most of them continued to do well,” Kyrklund said, adding there could still be some gas in the proverbial tank.
Yes, the Magnificent Seven (or six) could go further
According to the CIO, the Magnificent Seven are not at extreme valuations when compared to technology shares at the height of the Dotcom boom. More importantly, the stocks are weighing in with decent earnings; something that did not happen in the months preceding the Dotcom crash. To summarise, these shares could go higher, but investors should not ignore other opportunities with strong potential. Case in point, US utilities shares have been on a charge this year as investors cotton on that the artificial intelligence (AI) theme has an insatiable appetite for energy.
“AI is a key topic,” said Rode. “What is noteworthy in this context is that most of the innovation in AI is currently taking place in venture-backed startups, and if you look at pure-play AI companies, nearly all of them are still private companies.” Sorry for you, dear reader, but accessing the next technology-backed return dividend may not be as simple as buying a fractional share or two via your Easy Equities account. Rode said there were hundreds of start-ups being created to work on applications to bring AI to consumers and help enterprises to reinvent processes. His crystal ball prediction: “We are still very much at the beginning of the AI trend, and it is being driven by private market and venture capital investments.”
Financial advisers will have to ‘box clever’ to move client portfolios into the sweet spot of financial market returns in the coming year. “If you move away from the mega caps in the US and look internationally, the valuations do look more attractive, suggesting there is more potential for return elsewhere,” Kyrklund said. She added that equities will remain a great source of return over the coming year but warned that US equities were somewhat stretched on a longer-term comparison between US equity and bond valuations. For equities, the CIO pressed for a bottom-up, global approach while always keeping a close watch on the interplay between bonds and equities, using the level of the US 10-Year Treasury yield.
Bonds are for income, commodities for diversification
Turning to US bonds, the asset manager suggested they be included in portfolios for their income-generating properties rather than for diversification. “You do not own bonds for their diversification properties because there are concerns about deficits and loose fiscal policy … you own them for their income-generating properties,” Kyrklund said. As the end of 2024 looms, bond yields were looking good while bonds seemed “tactically cheap” to boot.
Hers was an interesting observation in a world where the mix of cash, bonds, equities and listed property is often viewed as the first-level diversification in a portfolio. Those seeking an alternative return diversifier should look to commodities, including gold. “Owning diversifying investments that improve your portfolio resilience is very important; and compared to the last decade, when commodities really offered no diversification, we have seen benefits from owning commodities more recently,” the CIO said. “The main transmission mechanism from geopolitical tension to economic growth and markets is via the commodity channels.”
Private markets are set to offer attractive opportunities in 2025 too, driven higher by three favourable cycles. These include the economic cycle, where interest rates are expected to normalise, providing tailwinds for growth; the private market cycle, which has seen a three-year slowdown in fundraising and valuations, creating openings for new investments; and the transformative technology cycle, driven by innovations in AI. “The beginning of [a transformative] cycle is always especially attractive from an investment perspective,” Rode noted, highlighting opportunities in areas like small and mid-cap buyouts and venture capital.
A strong play on renewables
Private markets provide stability during market downturns due to their long-term structures and sector diversity. “In this space, we deal with valuations rather than market prices, which takes some volatility out,” he explained. Finally, private markets are playing a growing role in shepherding investments into renewable energy as the world seeks to meet its climate-related decarbonisation targets. Rode concluded that despite geopolitical uncertainties, the economic rationale for renewable energy and net-zero commitments will continue to support investment opportunities in wind, solar, and related infrastructure into 2025 and beyond.
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