Investment Outlook - Market Update
2024 was an exceptionally positive year for equity markets, while also noting an extremely polarised year of returns. Amongst themes, the dominant performance of the Magnificent Seven US-technology names and ‘US exceptionalism’ in general, resulted in major performance divergences across regions, industries as well as huge disparity among stock returns between the winners & losers. The year also saw other themes driving investor sentiment, such as during H1 “stronger for longer” US macro, lower government bond yields dominating during Q3, and the last months of the year fixated on the US Presidential election.
As I write, I am if anything concerned there is too much agreement on the outlook for the year ahead! Everywhere I look consensus is promoting US exceptionalism, a strong dollar, and higher-for-longer yields again. Meanwhile on Europe, there is general agreement on economic weakness and expectations for much ECB rate cutting, and headwinds for European stocks. Equally, investor sentiment on China is universally downbeat, while investors see the rest of the Emerging markets region primarily through the lens of tariff threats from the USA.
While much of the above makes sense in the short-term, I cannot see 2025 playing out per consensus. The current polarised world is unlikely to persist, and there is the opportunity for strong convergence trades to win through 2025. The ingredients are in place such as extreme investor regional positioning as well as valuation differences across industries, and themes such as growth compared to value. 2025 is likely to be the opposite to 2024, with much more modest absolute market-led returns while offering a strong environment for additive stock picking.
Macro wise, while we agree that a soft landing in the US economy is the most likely outcome, we are also mindful where risks lie – we believe they are to the downside. We are strongly cognisant of the many global geopolitical uncertainties that remain, and which could flare up to undermine investor sentiment. For portfolio managers choosing stocks, downside protection will be ever present in our minds.
Asset class outlook:
Equities
As a result of the strong market returns which exceeded earnings growth, equity markets at an aggregate level are trading above historic valuation levels. As noted earlier, we continue to highlight the major discrepancies in valuations, particularly across the US equity market.
The US market itself now dominates the MSCI World index at approx. 73% weight, and the US market itself is dominated by the top ten stocks many of which are technology names. As global portfolio managers, we highlight that this does not represent a proper globally diversified index and, to the contrary, risk is now highly concentrated towards and within the US stock-market. Looking ahead, we do see the strong case for convergence rather than further divergences in performance trends.
For global equities, valuation alone argues for a better outlook for regions such as Europe and Emerging Markets, while Global small-cap names should also benefit. We also expect a broadening out of performance within markets and see a strong case for rotation that should benefit styles such as value, which we believe are supported by good fundamentals. M&A activity may also pick-up given attractive valuations in some areas.
While the strong consensus is for a soft landing and a positive catalyst for rotation, we are also mindful of slowdown being a risk. We do argue that should a slowdown occur that valuations are such that for much of the stock-market, it should be a catalyst for a rotation and broadening of performance across the market, an environment that should suit good stock picking. In addition, against an environment of flat bond yields, higher yielding income equites may be a very attractive place to be.
Bonds
Bonds as an asset class, having experienced two difficult back-to-back years of performance during 2022 & 2023, were more volatile and again generally struggled for the year 2024. At KBI, we don’t envisage notably lower bond yields, believing that bonds are currently fairly valued rather than cheap. The Republican victory in the US election combined with a reasonable chance of tariffs would also be inflationary and negative for US bond markets. Risk wise, we continue to monitor corporate bond markets for any signs of distress at a company or indeed sectoral level; spreads that to date have shown very little if any signs of stress.
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