As the US prepares for a political changing of the guard, our CEO shares his thoughts on where he sees markets opportunities and the potential risks for investors in 2025.
In 2024, US stocks kept surprising everyone with big gains. Now, with a new administration about to take the reins, the uncertainty is palpable. While no one can truly predict what this year will bring, we have identified some areas of opportunity – and some potential pitfalls – to look out for in the broader market and asset management industry.
Investors are still flocking to US markets
US equities continued to post double-digit returns in 2024. This prolonged dominance is notable: while the US accounts for approximately 70% of world market capitalisation, it only accounts for about 30% of world GDP.
On one hand, it makes sense: corporate earnings growth has been robust. The consumer and the economy have been resilient. The Federal Reserve has managed to engineer a soft landing – at least so far – reducing inflation while avoiding a recession. US technology firms, particularly several mega-cap firms, are driving global advancements, accounting for a significant portion of US market capitalisation.
The flipside is continued weakness abroad. Europe is in a tough spot. Growth is slowing, in part because of soaring energy prices. Great companies are out there, but more needs to happen from a macro perspective (ie, rate cuts) to get Europe back on a path to compelling growth. China, a bellwether for emerging markets, has also been facing challenges over the past few years.
The ongoing strength of US equities means valuations remain high. And while these valuations are backed up by strong earnings and credit fundamentals right now, there isn’t a significant margin of safety if something goes wrong in the future. At the core of what we do is deep research into what is driving valuations so we can identify sustainable, long-term investments. This matters because it is simply harder to find attractive opportunities in expensive markets.
Geopolitical volatility continues to lead potential risks to markets
It is challenging to predict political risk, but it shouldn’t be overlooked. The current climate calls for a margin of safety in portfolios, and while it doesn’t necessarily change our market outlooks we are investing with a heightened awareness of these global risks and their potential impacts.
For starters, President-elect Donald Trump will reshape international trade terms, but the market impacts are uncertain. While the implications of Trump’s proposed tariffs remain to be seen, we know that tariffs represent a tax on imported goods and those increases are often passed on to consumers in the form of higher prices. If this leads to higher inflation, we could see yields on 10-year or 30-year Treasuries hit 5%-6%. There could also be offsetting effects – like capital inflows – potentially benefiting domestic equity and fixed income markets.
Diversification is back and can help investors cushion volatility
Performance has been concentrated in a small section of the US large-cap market, but there are opportunities for investors if they look further afield.
Japan is making significant progress trying to turn its banking and savings-driven economy into an investing economy – and it will likely accelerate. While not a cheap market, it is not as expensive as other developed economies. Japanese companies typically carry low debt and the overall political environment is relatively stable.
There is an opportunity for investors to get quality smaller companies at an attractive price. While smaller companies are riskier by definition, current domestic small caps have been discounted for a while and the valuations are compelling.
Municipal bonds should be considered for a core fixed income allocation in taxable accounts. Even though munis generate high-quality tax-free income with an attractive equivalent yield compared to taxable bonds, they are often overlooked because many investors have the bulk of their investments in tax-deferred retirement accounts, where tax-free investments don’t make sense.
Previous industry trends persist, with new ones emerging
For quite some time, the number one trend in asset management has been too many managers and not enough assets. The competition for market share is as intense as ever, and the industry consolidation hasn’t been significant enough.
There is a growing demand for alternatives and making them more widely available to a broader base of investors. Since many alternatives are less liquid than traditional asset classes, investors need to weigh potential higher returns and diversification at the cost of less liquidity.
Finally, we continue to see increasing interest in a greater variety of investment vehicles, including separately managed accounts, model portfolios and active ETFs. Investors are seeking lower fees, efficient ways to build portfolios and more customisation. Mutual funds will continue to play an important role in investor portfolios, particularly in qualified accounts, but vehicle preferences continue to evolve.
The challenge – and, frankly, opportunity – for asset managers is to be able to match the right vehicle to the right investor and deliver the desired investment outcome. The more efficiently and effectively we can do that, the better it will be for our clients’ portfolios.
