14 Jan 2025
In this month’s Investment Perspectives, we’ll explore the key drivers shaping portfolio performance in 2024 and share insights into what we think the future may hold across the ever-evolving investment landscape.
From an equity standpoint, 2024 carried forward the momentum of 2023, with the US market leading the charge in delivering impressive portfolio returns. The IA North America sector surged by over 22% and the index showed stellar performance, and growth-focused approaches stood out with remarkable outperformance.
The Magnificent 7 continued to steal the limelight, driving the overall index and market. Donald Trump’s proposed policies support US businesses and offer potential tailwinds for US corporates and a stronger US dollar could give domestic corporate earnings an added lift, making the environment even more favourable. Beyond the Magnificent 7, there’s plenty of potential for value stocks, mid- and small-cap companies to shine in 2025. All signs point to US equities being well-positioned to outperform and despite inflation concerns, for the US market to continue to grow and surpass other developed markets.
Let’s turn our attention to other areas. The Asia Pacific region delivered impressive double-digit returns in 2024, with China proving particularly strong. After a challenging first half of the year, the IA China/Greater China sector rose by over 14%. Meanwhile, India stole the show with the IA India/Indian Subcontinent sector generating returns of over 17% for the year. In contrast to China, most of India’s gains came in the first half of the year, as the second half was relatively flat, and there’s been some chatter about valuation concerns in India, but the fundamentals remain solid. We expect growth to slow in 2025, but the Indian economy still has strong support and may remain a standout performer from an economic growth perspective. Those steady fundamentals could very well translate into continued market resilience and attractive returns.
We had high hopes for Japan last year – returns in local currency terms were strong but the impact of yen weakness versus sterling affected returns for UK investors. Ongoing corporate reforms may bode well, but returns could be muted and then there’s the currency volatility so the jury is out on whether Japan will reach its potential in 2025, but valuations are supportive. China could rebound, depending on whether the government chooses to implement any significant policy stimulus, but the tariffs Donald Trump intends to impose could spell trouble and any ramifications would have a ripple effect across other areas of emerging markets and Europe.
Europe’s story wasn’t so bright in 2024 with growth only marginally positive overall. The economic issues became more pronounced in the second half of 2024 and the future growth picture looks complicated. Market valuations are close to the long-term average, so a valuation discount is illusive and the main economy, Germany, is struggling with Asia continuing to apply pressure on the electric vehicle market.
What about the UK? In 2024, the UK market lagged other markets but not to a disastrous extent from a total-returns perspective. Going forward, the UK has its own unique challenges with the rising costs of national insurance and increases in the national minimum wage. Inflation isn’t coming down as quickly as hoped, and prices are staying reasonably high, but the silver lining is the valuation discount, as the UK is still trading below the longer-term average. In the shorter term, given some of the budget policies and associated negativity, mid- and small-cap companies may struggle, but there is scope for interest rate cuts as inflation starts to come down, which could generate opportunities.
What about areas to watch in 2025? Some said that 2024 would be the year of the bond and there were high expectations, but the story was mixed. The anticipated rate cuts at the start of 2024 didn’t come to fruition and most of the conventional areas of fixed income failed to get off the ground, which led to negative returns from the UK gilt and global government bond markets. Corporate bonds performed well but long-dated bonds faced challenges due to their duration and interest rate sensitivity. The outlook for bonds in 2025 largely depends on inflation and rate cuts and whether the 2% inflation target is reached, and this will have a major impact on most fixed income strategies. 2024 wasn’t the year of the bond and 2025 is unlikely to be but, from a portfolio perspective, government bonds can provide downside protection against any significant economic downturn, so exposure is worth considering as returns are likely to be around the yield level.
Is the UK a safe bet in 2025? Negativity around the UK government and their policies is troubling markets but inflation aside, the Bank of England may deliver rate cuts faster than expected and if this is the case, the undervalued UK may be transformed into an area of interest.
So, what’s the plan for 2025? With markets evolving, having exposure to a mix of asset classes is more important than ever. Bonds may have taken a back seat recently thanks to equities delivering such strong returns, but it could be time to give them another chance and consider reintroducing them into your portfolios. You could stick with the equity trend that’s been driving returns over the past couple of years and keep riding that wave a bit longer but building in some downside protection could be the smarter approach. For those willing to embrace interest rate risk, government bonds may make sense as part of a broader strategy. There might not be one single big opportunity right now but there are small pockets of potential. Maintaining a realistic, well-diversified spread of assets could keep your portfolio resilient and adaptable in 2025. Diversification is the name of the game!
Stewart Smith, Head of Managed Portfolio Services
Katie Sykes, Client Engagement & Marketing Manager
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