Happy New Year! We hope that you have had a wonderful Christmas break, and that you’re feeling refreshed and ready for 2025. At Astute Investment Management, we certainly are! So much so that we’d like to take this opportunity to look ahead to all that 2025 can bring.
Before we do that, let’s briefly look back at 2024. To quote Shakespeare, “the course of true, diversified investment never did run smooth”, or something like that. We know that investments should be held for the long-term by an investor who is comfortable with volatility along the way. There will always be some years in which markets struggle. 2024 was not one of those years.
You can see the fund performance for 2024 in the video. All three funds have a benchmark of returns either in line with inflation or in excess of inflation, depending on the fund. They also have comparators, which are an amalgamation of other funds available for investment with a similar level of equity exposure (or exposure to company shares). All three funds significantly beat their individual benchmark last year.
Markets were buoyed across the year as inflation came down towards target levels, interest rates were cut in many key regions, economies continued to stay afloat, and markets took the global political shakeup in their stride.
2025
But that’s old news. As promised, let’s turn to 2025, specifically the three key positions we have taken in the funds going into this year, and some key risks that might raise their heads across the year.
Three Key Drivers for Fund Positioning
Trump
At the beginning of November, the US election results were counted, and it didn’t take long to reveal that Donald Trump won the election by having the most electoral college votes. It was a bonus for Trump to win the popular vote, too, meaning that the number of individual votes he received was the highest. This isn’t a given: Donald Trump won the electoral vote in 2016, but Hilary Clinton won the popular vote. The Republican Party also took control of Congress, both the Senate and House, so all in all, a landslide win.
Given that the size of the US equity market means that a globally diversified and passive equity investment would typically be over 60% invested in the US, and given the influence that the US economy has on the rest of the world, US politics has a huge influence over our funds.
It will take some time to fully understand how Trump’s intentions manifest themselves, and to clarify what his policies will be, but his rhetoric so far has been clear: to cut taxes, to put tariffs on all goods coming in, and to deport immigrants. All three of these key promises are typically inflationary; firstly, cutting taxes puts more money in consumers’ pockets to, well, consume. A higher demand will cause prices to rise.
Secondly, putting tariffs on imported goods will simply mean that companies will pass on the increase to consumers in the form of increased prices. Of course, the aim is to move the US consumer to domestically produced goods, which are likely to be sold at a higher cost when compared to the competitively priced imported goods that they were previously consuming.
Thirdly, deporting immigrants will suck labour from the workforce, pushing up wages, again putting more money in consumers’ pockets to push up inflation. The Bureau of Labour Statistics said that in 2023, almost 19% of the US civilian labour force was foreign-born.
Of course, monetary policy can and may well react accordingly, but until there is some certainty on what Donald Trump may do, the US Federal Reserve are likely to hang fire and not make any drastic changes. As more of the specifics are revealed, we will be poised to tweak positioning as necessary. We’ll be watching not only his policies, but also how he interacts with the leaders of other nations in 2025 and beyond. It’s safe to say Trump is a big character with the ability to make important friends and enemies.
What has been apparent so far from this US election result is that the markets aren’t concerned, and perhaps will be willing to roll with the punches.
Within the VT Astute funds, we are overweight in small and medium-sized companies in the US. Small and medium-sized companies typically stand to benefit more from corporate tax cuts than larger companies do, given that larger companies typically have the size and power to utilise various tax loopholes, and typically don’t pay as much corporate tax anyway.
We currently hold an underweight position in the US and an overweight position in Emerging Markets – although given the sheer size of the US market capitalisation, our exposure will naturally be a large one. In 2025, we will be assessing our equity positions, potentially looking to move some of the allocation from being overweight to Emerging Markets and reducing our underweight to the US.
Markets Broadening Out
Moving to our second key position. In recent years, market growth has been largely driven by mega cap companies, that is, huge companies that have dominated the market, think Nvidia and Apple. Consequently, an investment in an index such as the US based S&P 500 would mean a large proportion of your assets would be invested in a small number of companies. For example, the largest 7 companies make up 30% of the S&P 500 as of 11th December, rather than 0.2% each, which would be the proportion if each company of the 500 companies had equal weight.
We believe that the return in markets will begin to broaden out in Europe, the UK, Emerging Markets and particularly in the US. This means that we believe the performance of smaller and medium-sized companies in these regions will catch up to their larger peers. We are placed to take advantage of this by holding an overweight position in small and medium-sized companies.
Bonds
And finally, coming into 2025, our bond outlook sits apart from that of a year ago.
Whilst inflation isn’t firmly at targets in many key regions, broadly, the risk of deep and painful recessions caused by central banks trying to bring inflation in line is over. Interest rates are likely to continue to be cut, but at a more gradual pace, and bonds offer a satisfactory return if we believe they pose little risk. However, the current environment raises some risks for bonds.
Across the world, governments’ commitments to spending mean that deficits are large. In the US, the deficit is higher than ever (if we exclude the large amount of immediate post-pandemic borrowing). Typically, the more a government needs to borrow to fund its spending commitments, the more it puts itself at risk of being deemed fiscally irresponsible from those it is borrowing money from. However, the worsening fiscal position regarding US government borrowing seems to be going unpunished by markets, and there is concern that, if this rising deficit were to be viewed as fiscal irresponsibility, the outlook for US Treasuries could get ugly and fast. Many institutional investors hold such a large amount of government bonds that it only takes one to be turned off by huge government deficits to impact the market.
The lack of concerned market movement in US Treasuries sits in stark comparison to UK gilts, which have fluctuated in price surrounding fiscal speculation and budget announcements.
Over the last year or so, we have been able to take advantage of price movements in US treasuries, buying when markets have overreacted to news and the prices dropped, and selling when the prices came back. However, going into 2025, we have reduced our US Treasury exposure due to the risk we have mentioned here – they do offer a healthy rate of interest that we could opt to be paid by just buying and holding, however, there are now healthy rates offered elsewhere that we could take advantage of for what we believe is less risk.
Potential Risks
As the famous quote goes, “when the facts change, I change my mind”. We are always considering potential risks that could warrant a tweak to our holdings. Let’s look at a couple of the key risks that we’ll be watching.
Trade War
Donald Trump campaigned on a promise of applying tariffs to imported goods. This significantly increases the chance of a trade war in future, particularly if consideration and good communication aren’t applied to any future decisions.
Countries exposed to the tariffs would likely suffer a drop in sales, production and employment and a hit to their economy, so this is an area we will watch closely.
Geopolitics
As we enter 2025, Ukraine is still under invasion from Russia, rebels have overthrown the Syrian government, South Korea’s president is in turmoil following a declaration of martial law, and the Israel-Hamas war has spread across the Middle East. Given the fractious geopolitics, investment markets have been relatively unfazed, but that doesn’t mean the investment risk is non-existent. In fact, current geopolitics pose risks both to the upside and the downside: the risk of escalation brings about some more obvious risks, such as the inflationary impact of choked energy supply (the volatile oil and gas prices in the last three years have been felt acutely here in the UK).
Our hope would be for agreements, a ceasefire and peace across the world, for the sake of all of those individuals involved. There are clearly risks surrounding potential escalation in various regions, however there are also certain assets could stand to benefit from peace and the outlook improves. This is another area we will be watching in 2025.
Thanks for watching our outlook for 2025, if you have any questions, please don’t hesitate to contact your financial planner. See you next time.
