2025 investment outlook: sticking to the knitting

Shackleton’s Head of Investments, Charlie Lloyd and Senior Investment Manager, Wayne Nutland provide their take on what 2025 might hold for investors.

Looking back at 2024: a mixed bag

As one year draws to a close, and thoughts turn to what the future might hold for investors, it is helpful to look back at the past 12 months to help to understand the context in which global financial markets and economies find themselves.

Over the course of an eventful year in geopolitical terms, one of the most surprising outcomes was the extent of Donald Trump’s electoral win. Conversely, the scale of Labour’s victory in the UK general election was perhaps more expected. Meanwhile, in continental Europe, the fall of the German government, and a surprise election in France have added to uncertainties there.

Economically, the US has shown more resilience than had been expected going into 2024, and it appears as though the central bank, US Federal Reserve, has managed to tame inflation without triggering a recession.

2024 has been a positive year for risk assets overall, with global equities as measured by the MSCI ACWI Index (which represents the performance of large and medium-sized companies across 23 developed markets and 24 emerging markets) returning 20.7% in the year to the end November. However, underneath the strong headline numbers for global equities, the picture is more mixed. Once again, the US has outperformed the other major markets, again led by the large technology stocks. US equities have returned 28.0% compared to just 2.9% for Europe excluding the UK, 11.1% for the FTSE 100 and 9% for MSCI Japan. Demonstrating the importance of the large US technology companies to overall market returns in the US, it is interesting to note that smaller companies lagged their large-cap counterparts, with a return of 17.9%.

Bond markets delivered a reasonable performance, with US government bonds generating 1.8% in the year to the end of November, despite bond yields moving moderately higher (yields on bonds move inversely to prices, so when yield go up prices fall).

In contrast, holders of UK government bonds suffered an aggregate loss of 1.1% over the same period. Bonds issued by companies (often referred to as “corporate bonds” or “credit”) generally performed well. A particular bright spot was the riskier “high yield” part of the market, where less sensitivity to changes in yields and a decline in the yield premium corporate borrowers must pay in addition to governments led to strong outperformance versus government bonds. Higher quality global “investment grade” bonds returned 4.9% over the first 11 months of 2024, while their high yield peers managed to generate performance of 9.1%. (Please note: all figures above are expressed in GBP terms or, for bonds, hedged to GBP).

2025 outlook: a positive base case

Generally speaking, we believe that a backdrop of falling interest rates and continued economic expansion should be a positive one for risk assets like equities, and this forms our base-case scenario for the year ahead. Donald Trump’s victory in the US election does pose risks, and has led to elevated policy uncertainty, in particular with respect to trade tariffs and the potentially inflationary impact of some policies. However, at this stage we think his pro-growth agenda – manifested for example in corporate tax cuts and deregulation – is likely to outweigh the more negative policies. In practice, we think it is unlikely Trump will implement the more extreme elements of his agenda.

We view the outlook for the UK as being marginally better than for the Eurozone…

The outlook for Europe and China, facing unrelated but material headwinds, is less positive, although the Chinese authorities have been incrementally ramping up policies to stimulate domestic demand. Tariffs come at a bad time for both regions, with Europe’s two largest economies, Germany and France, suffering from political instability. We view the outlook for the UK as being marginally better than for the Eurozone, with the former expected to benefit from higher public spending and greater policy certainty under a Labour government with a significant parliamentary majority. Nevertheless, the lack of productivity growth, particularly in the public sector, continues to hold back the UK economy from breaking out of the current cycle of weak-to-modest GDP growth.

Equities

Stock markets greeted Donald Trump’s election win with a further burst of US outperformance versus other regions, and it’s hard to see this reversing in the short term. Whilst US equity valuations are undeniably elevated, the economic and corporate earnings backdrop remains strong and may well strengthen further with Trump’s domestic pro-growth policy agenda. Indeed, it’s possible that equities outside of the US may be more impacted by the growth-negative elements of his agenda, in particular via the impact of tariffs on European and Chinese equities. A stronger dollar may also weigh on activity in these regions.

Relatively high US stock valuations are to some extent skewed by the “mega-cap” technology stocks, with valuations more reasonable outside of this cohort. The sheer size of the mega-cap technology stocks is such that Apple, Nvidia and Microsoft each individually have higher market values than entire indices for the UK, French and German stock markets. Looking at the profitability and earnings momentum of the mega-cap technology stocks, their valuations are arguably justified, although we expect that increasingly the market will want to see strong earnings and profitability growth continue. Over recent weeks we have modestly increased exposure to US smaller companies in the Esprit funds we manage.

Technology remains a key driver of the US economy and the US stock market. We continue to hold the Sanlam Artificial Intelligence fund in the Esprit funds, providing us with specialist active management in sectors benefiting from high levels of investment and helping to boost US productivity growth. The fund typically holds 35-40 companies, covering various parts of the artificial intelligence value chain. Naturally, most of these are technology stocks, but the fund also invests in areas such as healthcare.

Outside of the US, equity valuations are lower, but the macroeconomic and earnings backdrop is more challenging. We should bear in mind, that although equities outside of the US are typically more exposed to global economic conditions, the equities of a country or region are not a proxy for the local economy, with several large, international and highly profitable companies found in many markets (e.g. TSMC in Taiwan, and SAP in Germany).

The UK equity market has suffered from several years of capital outflows, with international as well as domestic investors shunning UK stocks. Stamp duty, a lack of liquidity, a weak IPO market (meaning fewer businesses listing on the London Stock Exchange), and low valuations have sent investors looking for what many consider to be more attractive opportunities elsewhere, predominantly the US equity market. Former Chancellor of the Exchequer Jeremy Hunt, and more recently his successor, Rachel Reeves, have acknowledged that some reform of UK capital markets is needed, but we are yet to see these words backed up by decisive policy action. Healthy capital markets are vital for growing an economy, but in the meantime, it’s likely we’ll continue to see takeovers of UK companies by private equity and overseas investors where they perceive there are opportunities to acquire good-quality assets at cheap valuations.

Recent Chinese policy action may be positive for economic growth moving into 2025, although it’s debatable whether the authorities have taken sufficient steps to boost the moribund property market and consumer demand. More positively for emerging markets, stock valuations are not stretched overall in our view, and there is therefore scope for emerging market equities to perform well should the economic environment improve.

Bonds

The outlook for interest rate cuts has been moderated over recent months, at least in the US and UK. Consequently, bond yields have risen (prices fallen), although the more inflationary aspects of Trump’s policies may see bond yields move higher still, depending on the policies enacted and how the economy responds. However, at this stage inflation remains under control whilst the damage done to incumbents’ election prospects by the recent inflation episode should act as a check on the more inflationary aspects of Trump’s policies. Bond markets responded positively to the nominee for Treasury Secretary, who may act as a counterweight to further fiscal expansion given his strong reputation amongst business leaders and markets.

Taking a longer-term view, bond yields are materially more attractive for investors now than was the case a few years ago, offering positive real yields, whilst bonds retain their ability to buffer equity market weakness should an economic downturn emerge.  Bonds have cheapened relative to equities over recent years.

Corporate bonds remain relatively expensive versus government bonds, with investment-grade and high-yield bonds offering historically thin additional yields versus government bonds (the differences between the yields on different types of bonds being referred to as “spreads”). Nevertheless, we feel that these thin spreads are justified by the economic backdrop in the US, whilst total yields (essentially made up of the government bond yield plus the spread) are much more attractive versus history. Investors can also lock in attractive yields from emerging market debt, comparable to high yield bonds, although this entails various other risks associated with developing countries.

Alternative investments

Global infrastructure equities have delivered reasonable returns and have outperformed global listed property shares. We believe both should be well placed in the event of a sustained move lower in bond yields (equating to cheaper borrowing costs for governments and businesses alike), although we continue to favour infrastructure equities over property equities given the deep-seated challenges facing some areas of the property market.

Gold has been a very strong performer in 2024, despite higher government bond yields and a strong US dollar, which have historically been negative factors for the gold price. It seems likely that demand from central bank buyers, probably in response to the freezing of Russian assets after its invasion of Ukraine, has prompted some nations to diversify their reserves away from US dollar assets into gold, a trend which may well continue into 2025.

Despite a ratcheting up in tensions across the Middle East over the course of 2024, oil prices have remained remarkably contained, largely in response to record levels of US production and weak Chinese demand. Indeed, the incoming US President has been very vocal in his support for the US oil industry, and we expect policy incentives to further increase oil production in the US. However, OPEC continues to have a degree of influence over the global oil market, and they have maintained supply discipline in order to prevent prices from falling further.

Our overall verdict

Overall, we remain positive about the outlook for financial markets in 2025, although continued economic expansion will be crucial. As ever, the one quasi certainty is that there will be surprises in both economies and in markets, even if there are fewer electoral events scheduled than have been seen in 2024.

As investment managers, and stewards of our clients’ capital, we employ long-term “strategic” allocations to different asset classes and regions that are carefully designed to ensure that the resulting portfolios are aligned with our clients’ expectations and attitudes to risk. In addition, and within deliberately designed limits, we are also able to make shorter term “tactical” investment decisions, both to take advantage of opportunities that may arise (for example, as a result of a fall in the prices of particular assets to attractive valuations), and similarly to help manage downside risks.

While there is little to nothing that any investor can do to predict the timing of negative surprises on financial assets, that is not to say that they cannot prepare themselves. In our view, the only prudent course of action is to ensure a good level of diversification, given that different assets almost invariably react in different ways to different developments; it goes without saying that we maintain a sharp focus on ensuring that the funds and portfolios we manage on behalf of Shackleton clients retain appropriate levels of diversification.

Although short-term movements in financial asset prices may seem unnerving, we never lose sight of the almost universally accepted principle that it is time in the market, rather than attempts at timing the market that will reward investors over the long term.

Whether it is called “staying the course,” or “sticking to the knitting,” we firmly believe that acting in our clients’ best interests in 2025 will involve remaining faithful to these tried-and-tested principles – and that is exactly what we intend to do.

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Written by:

Charlie Lloyd
Head of Investment, Shackleton

Wayne Nutland
Senior Investment Manager, Shackleton

Important information
This article is issued by Shackleton which is a trading style of Shackleton Advisers Limited. Shackleton makes no warranties or representations regarding the accuracy or completeness of the information contained herein. We have prepared the following document based on our view of the current market. This article shall not constitute an invitation or inducement to any person to engage in investment activity. Nothing in this document shall be deemed to constitute financial or investment advice in any way. We recommend you speak to your adviser before making any decisions. Past performance is not a guide to future returns and the value of capital invested and any income generated from may fluctuate in value.