Each year, I come into the office between Christmas and New Year and quietly plan for the year ahead. Over the past four years, I have asked myself ‘how can next year be any more volatile?’
It seems that each year becomes slightly more crazy than the last!
So how are we approaching 2025 and are there some clues in the year that we are now leaving behind?
I thought it might be useful to break my thoughts up into three simple parts covering the UK firstly, followed by a Global ‘flyover’ finishing in the US. My data is based at the 10th of December – so beware if you are reading this when things have changed!
UK:
The media coverage for the UK has been typically gloomy, but are things really ‘that bad’?
Let’s firstly consider GDP (Gross Domestic Product). This is the growth in our collective economy. If the GDP is expanding – it means that we are doing better. If the GDP is contracting – it means that we are in difficulties.
GDP for the second quarter of 2024 (April-June) was quite pleasing at around 0.5% growth. However, it fell off a cliff in the following quarter (July-September) to just 0.1% growth. When we consider how bad confidence has been for UK smaller businesses since the summer – I am not looking forward to the final quarter results which will come out next year. I predict the start of a recession.
However, the UK Governments plans for greater infrastructure spending could temporarily boost GDP as we move further into the summer of 2025. A lot will depend upon how quickly the Government can actually get large building projects underway to start stimulating the economy. It also depends how much borrowed capital is actually deployed to the coalface and how much is lost in ‘consultations’ and other public spending.
The FTSE 100 (the largest 100 companies in the UK) enjoyed a pleasing 2024 with growth at around +10.5% over the year. However, the growth was only +1.2% since the summer.
Let’s consider the impact on medium sized UK companies. We can test the temperature of this with the FTSE 250 index. Here we did again see some growth over the year but a fall of around -2.7% since the end of the summer.
Finally, the picture for small UK companies was bleaker. We invest into UK Smaller Companies funds and observed falls of around -6% since the summer.
In conclusion, we are concerned by the UK as an investment market right now. UK Smaller Companies are the lifeblood of the UK economy and it is hard to see a turnaround in confidence for these smaller employers anytime soon. I am expecting a recession for the UK in 2025 – but I am so happy to be proved wrong!
Our allocation to UK funds has been reduced slightly at our latest quarterly review – particularly in the UK Smaller Companies space.
The silver lining to the UK is how cheap it’s shares are compared to the US and Europe. We look at something called the PE (Price to Earnings) ratio when considering a market. Currently the UK FTSE 100 is trading at a much lower ratio than the US and slightly lower than Europe. This does suggest that there is good value in these stocks and potentially we could see international investment if they continue to fall. Therefore (despite a potential recession) I can see recovery potential in UK Mid and Large cap funds perhaps from the middle of next year onwards.
Global ‘flyover’:
Well the truth is that there are several parts of the globe you wouldn’t want to ‘fly over’ right now!
The war in Ukraine has continued to ‘suck in’ a lot of international energy, affecting supply chains and forcing up inflation. The incoming US President reckons he can fix it. Let’s hope he can. If a proper agreed peace can be achieved for Ukraine, the poor people suffering there may be able to rebuild.
In addition, we might see international stocks really start to lift in 2025.
However, we also continue to watch the situation in the Middle East with some concern. It is often not so much the actual conflicts but the ‘knock on effects’ such as mass migration that causes issues for Western democracies.
I also worry about North and South Korea, as each side is backed by either China or the US and the potential for fallout here is huge. Hopefully common sense will prevail.
US Tariffs on foreign imports could also prove a big headwind for global growth in 2025. However, markets are already starting to ‘price in’ a return to ‘America First’ politics. Notably, the Hang Seng China Market Index is down over -10% over the past couple of months and the Nikkei 225 Japan Market Index is trading flat over the same period. There is potential here for a boost if Mr Trump decides to be a little more conciliatory. (I know – that is probably not a word he recognises!)
There is also potential for boost with Chinese government stimulus packages.
Europe is currently at sixes and sevens, dealing with the ousting of a French Prime Minister and the collapse of a German Government – fuelled in the main by Populist parties on the far Left and Right attracting massive levels of public support. Europe has been the unfortunate benefactor of uncontrolled mass migration from Ukraine and the Middle East over the past decade – and this issue is leading to considerable discontent.
The recent overthrow of the Syrian regime might offer some respite as potentially some migrants return home. However, central political parties across Europe are struggling to ‘see off’ the more impassioned views of the anti-immigration parties. Personally, I feel that we will either need to see more prosperous western economies or a very targeted narrative by the central parties to avoid a replay of the 1930’s.
Emerging Markets (countries like India, Brazil, Mexico etc) really interest me as they offer some fantastic value currently. This is due to a very strong US Dollar making exports very hard for them. If interest rates were to fall in the US – we could see a very encouraging rally in this unloved sector.
So, in conclusion, the case for a Global Bull Market in 2025 is thin…..but!…..there is so much negativity built in to these markets as we come to the end of 2024 that actually there is scope for pockets of growth.
United States:
The inauguration of Donald Trump will change the focus for investors in the US. It is likely that his administration will seek to reduce regulation and taxes on corporate America. This is good news for US domestic markets. In addition, it is likely that the new administration’s desire to spend on infrastructure could lead to an economic bounce.
The US Equity market has already ‘built in’ some of this good news with expectations fairly high. The S&P 500 index is up around 32% over the year and some 14% over the past six months. Interestingly, the growth is no longer just coming from those ‘famous five’ US stocks (Apple, Microsoft, Nvidia, Meta and Amazon). We have seen an average return on those five stocks of around 17% over the same six-month period. This is very positive news.
The one ‘flip side’ to the US market excitement is the need for US Interest Rates to be cut. The Federal Reserve (US Central Bank) can only cut rates if they can demonstrate that US inflation is falling. If Mr Trump ‘stokes’ the economy too much, the FED may be forced to hold interest rates higher for longer which will hurt US Bonds and pretty much the rest of the worlds’ prosperity – unless global GDP can catch up with interest rate levels (which I doubt).
As with everything, there are multiple considerations. If the US economy fails to pick up, we could see US markets falling but the US Dollar weakening which would really help Emerging Markets and Asia.
Conclusion:
Nothing new here from me! Diversification is still the key – even as we are coming into a year where everything looks pretty set up for a US resurgence with the rest of the world playing catch up. There can be many slip between cup and lip – and our clients’ portfolios are painstakingly designed to pick up points when the unknown happens.
I feel pretty positive about 2025 – despite such a tough four years. We have seen a lot of recovery in 2024, but I feel there is more to come.
I am 100% convinced that we need to be invested into the markets. Sitting on the side-lines in cash is just not a sensible option for the long term with inflation still hungry to erode capital that isn’t growing.
As always, we are here if you need anything at all and here’s to a wonderful 2025!
Darren
