Most investors make a New Year’s resolution to revamp their portfolio. But, in 2025, an unusual amount of uncertainty surrounds this annual makeover.
How will President-elect Donald Trump’s plans for tariffs play out – in the US and around the globe?
Will new firms emerge to slow the ascent of the big tech firms that have been boosted by the generative artificial intelligence (AI) revolution?
John J Hardy, chief strategist at Saxo Bank, argues that 2025 will be a year of ‘big questions’ but it will also be a year of excitement.
‘We’re entering a new era,’ he says. ‘Old economic models are breaking, but that creates opportunities.’
What is the best way to make the most of these perplexing conditions?
Top markets: US was the best performer by a clear margin, with Germany runner up in 2024
Be an optimist, says Mike Fox, head of equities at Royal London Asset Management. ‘This is not to say that investments can only go up,’ he adds.
‘Clearly they do not in some years.
But, over the long term, societies improve, economies grow, innovation thrives – and optimism wins.’
If you like this way of thinking, here are the themes predicted to set the direction of the major stock markets in the months ahead.
America
Donald Trump will be sworn in as US president on January 20, and thereafter embark on the implementation of policies that include the imposition of import tariffs and cutting the federal budget by $2tn (£1.6tn), with the help of Tesla boss Elon Musk.
The scale of the endeavour is huge, but there is a conviction that the results could be rewarding.
Niamh Brodie-Machura, co-chief investment officer at Fidelity, believes that the profits of US companies will exceed those of other developed counties, ‘reinforcing American exceptionalism’.
Rathbone Asset Management stresses that investors should be prepared for disruption: ‘It’s Trump, so it’s prudent to expect some good, some bad – and some wild.’
Donald Trump: Policies include the imposition of import tariffs and cutting the federal budget by $2tn
Peter Branner, chief investment officer at Abrdn, warns that it would be perilous to underestimate the extent of the disruption.
Against this background, Rathbone argues that ‘US stock prices may not be cheap but aren’t expensive either’, adding that growth should come from a mix of ‘tighter finances, less bureaucracy, more private enterprise, cheaper energy and interest rate cuts’.
In 2024, the best way to profit from American exceptionalism has been to back the tech stocks that make up the mega-cap Magnificent Seven – Google owner Alphabet, Amazon, Apple, Meta (the Facebook and Instagram group), Microsoft, Nvidia and Tesla.
The Magnificent Seven should continue to dominate, but Goldman Sachs Asset Management is urging investors to look beyond this gang if you want more exposure to the generative AI revolution.
For example, the semiconductor group Broadcom, which designs processors to accelerate AI systems, is being seen as ‘the new Nvidia’. Stephen
Yiu, manager of the Blue Whale Growth fund, says Nvidia, which is already a $3.3tn firm, would find it hard to grow another 50pc. As a $1tn company, Broadcom stands a better chance of such expansion.
For a wider bet on the ‘America first’ strategy, consider an investment trust such as JPMorgan American, which holds Apple, Meta, Nvidia and Trane Technologies, which builds cooling systems for the vast data centres on which the AI revolution relies.
Mike Fox of Royal Asset Management describes the building of these centres as a ‘once-in-a-generation investment boom’.
McDonald’s is another holding. Jack Caffrey, the trust’s manager, says that this fast food chain has ‘an iconic, quintessential American brand – and a very defensive model’. A third of the US population eats there every week.
America’s smaller companies are also worth your consideration in light of the prediction from BNP Paribas that their profits could rise by 30pc in 2025 and 2026.
Artemis US Smaller Companies and Premier Miton US Opportunities are the experts’ fund picks to make the most of potentially remunerative disruption in this sector. Trump’s desire to deregulate the takeover rules could produce merger mania.
UK
Anxiety over the fallout from the Autumn Budget, inflation and the cost of borrowing seem set to loom over the UK markets.
But the gloom is not all-pervasive. For one thing, since our manufacturing sector is small, we should be less affected by Trump’s tariffs. As many as two-thirds of respondents to a survey by the broker Jefferies expect the FTSE 100 to rise in 2025.
Analysts contend that many British companies have strong balance sheets – and are generating cash. This suggests they should be more resilient if interest rates stay higher for longer and inflation proves sticky.
Guy Anderson, manager of the Mercantile investment trust, sees reasons to be cheerful in low unemployment, real wage growth and the nation’s low level of household debt.
Given these factors, Anderson is sanguine about the prospects for housebuilders, such as Bellway. Since the Budget, these firms’ shares have tumbled, amid doubt over the Government’s building targets, but they are now beginning to look oversold.
The perception that UK shares are a bargain could mean another burst of takeover activity, following this year’s merger mania, with £52bn of deals for British businesses struck by early November. FundCalibre suggests the TM Tellworth UK Smaller Companies fund as one route to take advantage of this trend.
As 2024 ends, there is talk that the focus on the US means that UK markets are no longer ‘relevant’. Carl Stick and Alan Dobbie, managers of the Rathbone Income fund, are keen to dispel this notion, resolving to champion the cause of UK plc as a source of dividends for the millions who invest primarily for income.
AJ Bell forecasts that the members of the FTSE 100 will pay out £83.6bn in dividends in 2025, a 6.5pc increase on 2024 – and a new record.
Europe
Summoning enthusiasm for Continental Europe will be hard in the months ahead. Germany, formerly the EU powerhouse, has been in recession in all but name, while France is politically gridlocked and facing fiscal problems of such magnitude that Abrdn argues it should be seen ‘as a peripheral market, rather than a core one’.
This sounds unappetising but contrarian investors may think differently. Jules Bloch, co-portfolio manager of the JPMorgan European Discovery trust, says the valuations of European smaller companies are ‘at some of their most attractive since 2012 – interest rates have peaked, real wages are growing, and consumer sentiment is improving’.
Bloch argues these companies include the next winners from AI and drug-assisted weight loss. This month the heady rise of Novo Nordisk, maker of Ozempic and Wegovy, was halted by poor results for its new Cagrisema drug. But a more obscure Danish firm is waiting in the wing: Zealand Pharma, whose products also include a weight-loss treatment.
The woes of France and Germany have overshadowed the bounceback in Spain, whose Ibex index is up by 13pc this year, and in Italy where the Borsa Italiana has increased by 10pc.
The European Smaller Companies trust is a way to take a stake in the recovery of the beautiful south – and a bounceback elsewhere.
China
China will be the primary target of Trump’s tariffs. But there are indications that Beijing is readying itself for a trade war, preparing to vigorously boost consumption, improve investment efficiency and expand domestic demand. The world’s second largest economy will be endeavouring to arrest its decline with a three trillion yuan (£327bn) bond issue to finance innovation.
But betting on a successful outcome will require strong nerves, in light of this year’s failed stimulus packages.
Nevertheless, as John Citron of the JP Morgan Emerging Markets investment trust says, China’s advanced manufacturing and electric vehicle sectors are thriving, thanks to government policies that do seem effective.
BYD, the electric vehicle maker, is on track to sell more cars in 2024 than Ford or Honda. Its shares have soared by 634pc since 2019.
But analysts still rate the shares a ‘buy’.
Can the combative Trump (pictured) block BYD’s progress? Or will the company continue to move faster than the European car makers in 2025?
That is one of the things that investors will be watching in 2025 – in a year when no one can assume that they have all the answers.
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