Multi-Asset Solutions
December 2024
- The biggest challenge going into 2025 is conflating political and geopolitical risk with investment outcomes
- Even if US stock market valuations are not cheap, the fundamentals make it a compelling investment destination for 2025
- While inflation will be something to watch in 2025, steady engagement in high-quality firms has proven to be an effective hedge over time
1. What do you think could be the biggest challenge or opportunity for clients in 2025?
The biggest challenge for clients going into 2025 is conflating political and geopolitical risk with investment outcomes. Stock markets are governed by sentiment in the short term as seen recently with China’s stimulus package boosting the country’s equity markets and Donald Trump’s election victory driving up bank and technology stocks, the US dollar and cryptocurrency. Capital markets can, of course, conversely display pronounced volatility if sentiment sours, as evidenced by the oil markets amid the ongoing war in the Middle East.
In the short term, there is always cause for euphoria or panic, with recent news flow providing a richer supply of the latter. The role of professional investment management is to guide clients through such times and remind them that in the medium to long term fundamentals matter most. Historically, the long-term rate of return for stocks has been around 7%, as per the Siegel Constant, depicting decades of turbulence including wars, political upheavals, pandemics and crashes. Today is little different.
2. What do you see as the one major investment opportunity for you in 2025 and how can you capitalise on it?
The major investment opportunity today lies in the relative strength of the US. Setting aside the election for now, the US economy is fundamentally sound, growing at just under a 3% annualised rate. Unemployment, at just over 4%, is low by historical standards. Consumer sentiment surveys broadly reveal confidence. Jobs are being added in significant numbers on a trend basis. Wages are outpacing inflation. All of this then feeds into the stock market, particularly further down the capitalisation structure where corporate earnings are even more closely correlated with economic growth.
The US stock market is of course enjoying an additional kicker from the artificial intelligence (AI) revolution. Firms involved in AI are now moving from the speculation to the investment phase, which means investors can potentially look forward to real payoffs as the economy starts to integrate AI on several levels. The US technology sector is uniquely placed to capitalise on this with its deep funding and innovation ecosystem, and close links to talent from academia. Even if US stock market valuations are not cheap, the fundamentals make it a compelling investment destination for 2025.
3. What is the biggest risk to your asset class next year and how can you mitigate that risk, or even turn it into an advantage?
The biggest risk to our longstanding engagement in equities, particularly in the US, is probably inflation. While not an immediate threat, a strongly performing US economy could face capacity issues on three levels.
The first stems from the significant amount of money injected into the economy through the Biden administration’s stimulus programmes, including the CHIPS and the Inflation Reduction Act legislation. This had already contributed to the 2022 inflation and continues to exert pricing pressures. The presumed renewal of expiring tax cuts in 2025 under the new Trump administration would surely stimulate an already robust US economy, potentially prompting even more inflation.
Second, the imposition of swingeing tariffs would surely increase the prices of imported consumer goods.
Third, the election pledge to deport “millions” of illegal immigrants could also have inflationary consequences. According to the Pew Research Center, there were some 8.3 million unauthorised immigrants in the US workforce, making up just under 5% of the total workforce. Simply removing them does not address how they will be replaced, and many of these are in hospitality or agricultural roles, which American-born workers are simply not interested in filling.
From an investment perspective, US firms, particularly large ones, have historically been adept at managing inflation and exerting their own pricing power without sacrificing margin. This is especially true in the technology sector, which is people-light and tends to create its own markets and revenue streams. While inflation and potentially higher interest rates will be something to watch in 2025, steady engagement in high-quality firms has proven to be an effective hedge over time.
Julian Howard is Chief Multi-Asset Investment Strategist at GAM Investments.
Important disclosures and information
The information contained herein is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained herein may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information contained herein. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice or an invitation to invest in any GAM product or strategy. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio nor represent any recommendations by the portfolio managers nor a guarantee that objectives will be realized.
This material contains forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of GAM or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.
The information contained herein is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained herein may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information contained herein. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice or an invitation to invest in any GAM product or strategy. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio nor represent any recommendations by the portfolio managers nor a guarantee that objectives will be realized.
This material contains forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of GAM or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.