Crystal Ball Asset Management does not, unfortunately, exist and neither does the Perfect Foresight fund, but all investing is to some extent about predicting the future. So I invite you to join me as I gaze into my crystal ball, like the Mystic Meg of fund management, and attempt to decipher what opportunities and challenges investors may face next year. Just bring a hefty pinch of salt.
We start from the vantage point of sky-high US equity valuations following a year or several of stock market exuberance and American exceptionalism.
Robeco expects US equities to sustain their upward trajectory next year, but warned that market sentiment could shift abruptly as macroeconomic narratives evolve. Peter van der Welle, a multi-asset strategist, said: “The possibility of a stagflationary twist arising from trade policies could prove to be a powerful cross-current in an otherwise resilient US economy.”
Kristina Hooper, chief global market strategist at Invesco, was similarly bullish. “We continue to expect the US to deliver higher growth than other developed economies, largely due to the combination of its favourable demographics and immigration, its business dynamism and its healthy rate of productivity growth,” she said.
Whilst experts agreed that US mega-cap tech stocks are expensive, many other American companies are more reasonably valued and could start catching up with the ‘Magnificent Seven’ as the artificial intelligence (AI) value chain broadens out, said Hugh Gimber, a market strategist at JP Morgan Asset Management.
Meanwhile, his colleague Karen Ward, chief market strategist for EMEA, proposed allocating to undervalued opportunities in Europe and the UK.
“Policy stimulus in Europe may yet surpass market expectations,” she said. “The European Central Bank is expected to continue easing, encouraging consumer spending, and European leaders have fiscal tools to counter aggressive trade policies. Efforts to deploy the remaining EU Recovery Fund may also accelerate.”
Emerging market stocks are relatively cheap as well but here, investors should pay heed to regional disparities and shifting trade dynamics, said Gimber. “China's challenges haven't uniformly affected other emerging markets. Friend-shoring and global trade reshuffling have benefited economies like Mexico and Vietnam, while north Asian economies like Korea have benefitted from the tech cycle.”
Japan is another attractively valued market and Invesco expects the country to reaccelerate in 2025 as wage growth pushes up consumption.
Invesco also has a positive view on the UK and emerging markets due to their lower valuations and favours cyclicals and small-caps for their cheapness and greater sensitivity to the economic cycle.
Ultimately no asset manager knows whether the US will continue to outperform other regions next year or whether diversifying into less overvalued countries is a more sensible solution – although logic tells me that it is.
When Donald Trump enters the White House, I would expect uncertainty and volatility to increase, so regional diversification strikes me as a sound idea, even if non-US countries are about to get whacked with tariffs.
Investors should be wary that some global funds – both active and passive – have as much as three-quarters of their assets in the US, so as always, it pays to look under the hood.