Taken as a whole – and despite fragile geopolitics, volatile elections and unsteady economies – the world’s stockmarket glided gently higher in 2024. The MSCI World index matched its strong performance in 2023, fuelled by the ongoing rise of the seemingly Teflon-coated US technology sector. In 2025, markets will need to contend with a new incumbent in the White House, chronic instability in Europe and a potential revival in inflation. Here are five key areas to watch closely:
Yet more magnificence?
The US tech giants continued another astonishing year in 2024. Although their individual fortunes were mixed, the CNBC Magnificent Seven index was up 69% for the year to date, with chipmaker Nvidia the stand-out performer – up 178% over the year. Worries over valuations persist, however, and towards the end of the year signs emerged of market leadership broadening out.
This was actually an important consideration for asset allocators all through 2024. Active managers have tended to be edgy about the sector, with even growth managers such as Baillie Gifford reducing their holdings in Tesla and Nvidia on the back of recent share-price strength.
Continually healthy flows into passive funds may have continued to support these index heavyweights but active allocators are now looking to diversify their US exposure. “The deregulation agenda pursued by the Trump administration is likely to see the Federal Trade Commission make M&A activity easier, while relaxing bank capital regulations and granting more energy exploration permits,” reasons Peter Branner, chief investment officer at Abrdn. “Corporate tax cuts tend to benefit smaller companies most while, by contrast, tariffs will disproportionately hit internationally exposed firms.”
Helen Bradshaw, portfolio manager at Quilter Investors agrees – adding US markets could experience a “shorter-term economic sugar rush” – while increasing exposure outside the Magnificent Seven. She expects sectors such as financials and industrials to be the primary beneficiaries and her increased allocation has been primarily directed towards Quilter Investors US Equity Income fund within the Managed portfolios, and Quaero Capital Cullen US ESG Value and AB Global Sustainable Opportunities within the firm’ responsible and sustainable ranges.
“There are scenarios in which Trump’s policy agenda proves even more supportive for growth and market sentiment.
Inflation – again
Inflation was on the back foot for much of 2024. Having peaked in March at 3.5%, US inflation had been coming down, hitting a low of 2.4% in September. It nudged higher over the next couple of months, however, and there are concerns that Donald Trump’s agenda of deregulation, tariffs and tax cuts could prompt a more significant revival in 2025.
Mark Harries, chief investment officer at Square Mile Investment Consulting and Research, is one who believes this is a significant risk for markets in the year ahead. “A US bond market sell-off caused by the prospect of a soaring fiscal deficit and the threat of higher long-term inflation is not beyond the bounds of possibility,” he explains. “Furthermore, escalations in Ukraine and the Middle East may disrupt supply chains and increase energy prices.” That said, he notes goods deflation is likely to persist due to falling import prices from China.
Elsewhere the threat would appear less acute. In Europe, for example, weak growth is the problem rather than rising inflation and the European Central Bank (ECB) has continued to cut rates. The UK inflation rate ticked up to 2.3% in October but there are real signs of economic weakness. The result may be a significant divergence in the path of interest rates for some of the world’s major developed markets in the year ahead.
Return of the Mack
Donald Trump is back in the White House from January, with a more coherent and radical agenda than was seen in his first presidency. Policymakers across the world will be eager to separate reality from rhetoric on areas such as tariffs and trade policy – trying to understand what is a negotiating ploy and what is a statement of intent.
Says Abrdn’s Branner: “Moving into 2025, there is significant uncertainty about the precise contours of the coming policy shifts under president-elect Donald Trump. There is a substantial risk that the Trump administration proves much more disruptive than we are expecting, both to the upside and downside, in terms of economic and market outcomes – and there are scenarios in which Trump’s policy agenda proves even more supportive for growth and market sentiment.”
Arguably the biggest questions are around tariffs and who they will impact. It seems clear that goods are more a priority for Trump than services – meaning countries such as Germany and China could feel the heat, while areas such as the UK or Australia may not suffer as much.
Either way, disruption seems probable and – it may affect investment decision-making. “We expect tariff-rate volatility during the second Trump presidency to be much higher than under the first,” predicts the team at Oxford Economics. “This is supported by the latest readings of the trade policy uncertainty indicator, which measures newspaper articles on the topic and leads US tariff rate volatility by three years.” They reckon this is likely to delay or deter investment decisions long before any tariffs are actually implemented.
European dramas
Some of the largest countries in Europe appear to be entering a period of political instability. December saw President Macron appointed Francois Bayrou as his latest prime minister, but the government’s position still looks fragile. At the same time, the German election in February is likely to see far right politicians with a seat in government. European populists are increasing finding favour with restive electorates.
So far, the impact has been limited, with French bond yields remaining under control. Dickie Hodges, manager of the Nomura Global Dynamic Bond fund, says: “We expect the French political dramas will eventually fade, and their only impact on the portfolio in the short term is to cause volatility in the pricing of our subordinated French bank exposure.
“We see this impact as temporary and retain faith in the ability of French banks to continue to call these bonds. However, the economic woes of core Europe remain clear and they are unlikely to be improved by the potential introduction of tariffs by the US administration. The ECB is therefore likely to continue cutting rates.”
A UK revival?
At face value, a sudden revival from UK markets looks unlikely. The UK economy is flirting with recession, the supposed new era of political stability appears to have been short-lived and the November budget looks to have dented both corporate and consumer confidence. Yet the most recent round of IA statistics showed positive fund inflows for the first time since April, with UK equity funds seeing net inflows of £317m. It is not much, to be sure – but every revival has to start somewhere.
The performance of UK equities was also better in 2024, partly fuelled by a wave of merger and acquisition activity, plus buybacks. “There has been a feeding frenzy of M&A activity,” notes James Lowen, manager of the JOHCM UK Equity Income fund. “We have had 45 companies leave the UK market in 2024. That is the highest number in 15 years – and there have been bids for £160bn of our market cap.”
The extent of this M&A activity shows UK companies are increasingly being viewed as attractive targets for foreign investors, argues Lowen, adding: “The undervaluation of these stocks, combined with generally strong operating performance, is driving this surge in takeover activity.”
The UK market is cheap and unloved by most investors but, increasingly, it feels like this negativity may have gone too far – particularly given the political weakness of some European companies. Could 2025 finally be the year of the Great British Revival?
