In our regular monthly update, our CIO Richard Flax reflects on a strong 2024 for our portfolios, particularly US equities, and discusses a mixed outlook for 2025, with lower interest rates supporting growth.
As we all come back to reality after the holidays, we wanted to take a look back at 2024 and set the stage for the coming year.
2024 in financial markets may have ended on a fairly subdued note, but the year as a whole was pretty strong across most Moneyfarm portfolios. US equities led the way, driven by the largest companies, but we saw positive returns across most global equity markets. On the fixed income side, the returns were more muted – with government bond yields generally ending the year higher than at the start.
As we turn to 2025, there are a few things worth highlighting.
First, the macro backdrop remains mixed. The US economy continues to perform well, driven by consumer demand. Growth elsewhere in the world is a bit more muted – particularly in parts of Europe and China – but we aren’t expecting to see a recession in the near term.
Second, Central banks have begun to bring down policy rates, even while the global economy continues to expand. That combination of lower rates and a growing economy should be supportive for corporate earnings and financial assets.
Turning to valuations, the picture is again a bit mixed.
On the equity side, US equities look quite highly rated compared to history, but a lot of that is driven by the large tech companies that are delivering high returns, strong earnings growth and very good cashflow. Expectations for these businesses remain high, but we think the long-term potential for secular drivers like Artificial Intelligence is very significant. Outside the large US tech businesses, valuations look more attractive, but the earnings outlook is a bit more subdued. Here’s where we think lower interest rates could have an impact, potentially helping to improve demand and earnings growth over the coming 12 to 18 months.
On the bond side, it’s another interesting story. Yields remain quite high, certainly compared to the years between the Global Financial Crisis and COVID, and that should provide an important source of returns particularly for lower-risk portfolios. But the spread between government bonds and corporate bonds is pretty low versus history. You don’t get a lot of additional return for taking on that extra risk. With a decent economic backdrop, that might not be a problem, but it’s something we continue to discuss.
Inflation is probably going to remain an important topic of conversation in 2025. We’ve seen inflation rates come down a lot over the past year, but the pace of that decline has slowed as we’ve gotten closer to the 2% target. With demand still generally growing and interest rates coming down, we could see inflation stabilise above the Central Banks target level. That would give policymakers less room to manoeuvre, especially if we see global growth re-accelerate. We think there’s still room for policy rates to come down in 2025, but possibly not by that much.
Finally, we know that the geopolitical backdrop will remain complicated – particularly with the change of administration in the US. We’d expect the new administration to hit the ground running, as it aims to implement its agenda, but the exact shape of those policies is still unclear. As we’ve discussed before, we think at a high level the policy proposals are another mixed bag for financial markets. Lower taxes and less regulation should support US companies, but the prospect of higher trade tariffs could put pressure on export-oriented economies and businesses around the world.
So, 2025 is shaping up to be an interesting year. We see lots of opportunities, but possibly a few challenges as well.
With so many moving parts, we think it’s important not to be too distracted by all the noise. We use our Strategic Asset Allocation process, that we run annually, as a way to help us stayed focused on the long term – looking at expected returns over the next ten years. We’ve shared our latest version over the past couple of weeks. Our long-term forecasts suggest that expected returns aren’t quite as high as they were a year ago – not surprising given the strength we saw in 2024 – but that the long-term outlook remains pretty decent, particularly helped by solid expected returns in fixed income and non-US equities. We’ll discuss that in more detail in the coming weeks.
Our Strategic Asset Allocation for 2025
As we do every year, we’ve been working on our Strategic Asset Allocation, in which we detailed our comprehensive, long-term view across a wide spectrum of asset classes and the strategic positioning of our portfolios. The Strategic Asset Allocation process provides an important reminder of some of the core tenets of Moneyfarm – focus on the long term, keep your costs and turnover low, and don’t get too distracted by the daily news flow.
*As with all investing, financial instruments involve inherent risks, including loss of capital, market fluctuations and liquidity risk. Past performance is no guarantee of future results. It is important to consider your risk tolerance and investment objectives before proceeding.
