2024 was the first time the S&P Equal Weighted Index had underperformed the S&P 500 Index by more than 10% for two years running this century. Will this unprecedented run continue in 2025 or will there be a return to broader market participation? We believe the latter is highly likely and, therefore, stock selection will be more critical for 2025.
Mega rises for equities
Equities enjoyed strong returns in 2024, particularly in the US where the combined trends of momentum, passive investing and artificial intelligence (AI) led to a 23% gain for the S&P 500. In fact, US equities contributed 17% or almost 90% out of the 19.5% gain for the MSCI World Equity Index. Frankly, everything else represented a rounding error and so it is easy to see why US and international investors remained entrenched within the US equity wave.
Much of this wave was focused on the very largest companies, with Nvidia and Broadcom driving the biggest percentage gains, up 177% and 119% respectively. These two ‘AI’ titans contributed no less than 22% of total global equity returns. Add in the other mega caps – Apple, Alphabet, Amazon, Tesla, Meta and Microsoft – and together the (now) Magnificent 8 drove 50% of global equity returns.
The momentum wave
Just Ride the Wave: Momentum has had its best year in at least two decades
Source: Bloomberg, S&P Global, as at 31 December 2024.
Looking deeper into this move and as we stated earlier, the S&P 500 has had two successive years of outperforming the S&P Equal Weighted Index by a significant margin.
S&P 500 performance minus S&P Equal Weight (percentage points)
Source: Liontrust, as at 31 December 2024.
There have been two key factors driving this trend. The first is the ever-increasing move to passive investing. Since 2000, passive exchange traded funds (ETFs) have gone from almost nowhere to over half of all mutual fund investing. The impact on daily trading volumes is even more acute, with ETFs accounting for as much as one-third of trading volumes. Of course, the counter side of this is accelerated redemptions from active strategies. The Financial Times recently published the 2024 numbers to cap off a strong run of years for active outflows shown in the following chart.
Active equitites funds suffer record outflows in 2024
Source: EOFR and Financial Times, as at 31 December 2024.
Second, is the cycle of disruption that has taken on a new velocity with the advancement of AI. Hugely cash-rich mega companies have led a charge to build the biggest and best natural language models, necessitating massive levels of investment in infrastructure. This in turn has led to a sales and earnings momentum cycle rarely seen for mega caps, which adds even more fuel to the momentum fire.
The two trends of passives and disruption have together created a potent force in markets, leading to the highest level of stock concentration since the early 1900s. We believe this is set to abate in 2025 as investment opportunities broaden beyond the few and spread to the many that will benefit from advancing technology trends. This equates to a stock picker’s dream and a great opportunity for active managers.
Crypto – pending regulation heralds further mainstream adoption
We saw the approval of Bitcoin ETFs in January 2024, the fourth Bitcoin halving in April and Bitcoin blasting through $100,000 giving the currency a market cap of over $2 trillion. With the incoming Trump administration, we see this as a positive catalyst for the crypto industry and crypto/blockchain assets.
During the campaign trail, Trump pledged to make the US the crypto capital of the planet and the Bitcoin superpower of the world. With the nomination of Paul Atkins, a crypto advocate, as the Securities and Exchange Commission (SEC) chair, we continue to see this momentum continuing into 2025, with a more favourable regulatory environment, greater clarity and less regulation by enforcement. The establishment of advisory councils for digital assets, David Sachs appointed as the ‘crypto Tsar’ and discussions of a strategic reserve are further positive catalysts.
At a recent meeting with Coinbase, the CFO, Alesia Haas, gave us an interesting perspective on the strategic reserve issue. Speculation among crypto insiders is increasingly suggesting that crypto may become nuclear arms-race-like. One of the reasons for the US looking at it as a reserve currency is because not to have it leaves the US vulnerable to digital asset exclusion. If this view pervades, then there could be an arms race move for all countries to ensure they have an appropriate level of crypto reserves.
We continue to see Bitcoin ETFs as an easy path for investors, including institutional, to gain exposure to Bitcoin and see it becoming a long-term allocation rather than tactical exposure. Currently, spot Bitcoin ETFs hold over 1.1 million BTC, representing just under 6% of current supply. Blackrock recently highlighted in their Investment Institute paper that “giving Bitcoin a 1% to 2% weighting would produce a similar share of profile risk as the Magnificent Seven tech stocks in a standard 60/40 portfolio”.
The market also takes optimism from the upcoming inclusion of MicroStrategy Inc to the Nasdaq-100 Index given around $451 billion in ETFs around the world track the Nasdaq-100. We do not believe increased adoption of Bitcoin as a corporate treasury asset will be mainstream, however, as highlighted by the recent Microsoft vote against a Bitcoin investment.
Bitcoin has a unique HODL culture. Given Bitcoin’s inherent scarcity, with a cap of 21 million coins, and considered a store of value like gold, it is no surprise that more than 60% of Bitcoin held has not been sold in the last 12 months. While we are positive on Bitcoin, we are excited more widely for the crypto industry going beyond the store of value to productive assets, including decentralised apps to finance.
KEY RISKS
Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested.
The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.
The Funds managed by the Global Equities team:
May hold overseas investments that may carry a higher currency risk. They are valued by reference to their local currency which may move up or down when compared to the currency of a Fund. May encounter liquidity constraints from time to time. The spread between the price you buy and sell shares will reflect the less liquid nature of the underlying holdings. May have a concentrated portfolio, i.e. hold a limited number of investments or have significant sector or factor exposures. If one of these investments or sectors / factors fall in value this can have a greater impact on the Fund's value than if it held a larger number of investments across a more diversified portfolio. May invest in smaller companies and may invest a small proportion (less than 10%) of the Fund in unlisted securities. There may be liquidity constraints in these securities from time to time, i.e. in certain circumstances, the fund may not be able to sell a position for full value or at all in the short term. This may affect performance and could cause the fund to defer or suspend redemptions of its shares. May invest in emerging markets which carries a higher risk than investment in more developed countries. This may result in higher volatility and larger drops in the value of a fund over the short term. Certain countries have a higher risk of the imposition of financial and economic sanctions on them which may have a significant economic impact on any company operating, or based, in these countries and their ability to trade as normal. Any such sanctions may cause the value of the investments in the fund to fall significantly and may result in liquidity issues which could prevent the fund from meeting redemptions. May hold Bonds. Bonds are affected by changes in interest rates and their value and the income they generate can rise or fall as a result; The creditworthiness of a bond issuer may also affect that bond's value. Bonds that produce a higher level of income usually also carry greater risk as such bond issuers may have difficulty in paying their debts. The value of a bond would be significantly affected if the issuer either refused to pay or was unable to pay. Outside of normal conditions, may hold higher levels of cash which may be deposited with several credit counterparties (e.g. international banks). A credit risk arises should one or more of these counterparties be unable to return the deposited cash. May be exposed to Counterparty Risk: any derivative contract, including FX hedging, may be at risk if the counterparty fails. Do not guarantee a level of income. May, under certain circumstances, invest in derivatives, but it is not intended that their use will materially affect volatility. Derivatives are used to protect against currencies, credit and interest rate moves or for investment purposes. There is a risk that losses could be made on derivative positions or that the counterparties could fail to complete on transactions. The use of derivatives may create leverage or gearing resulting in potentially greater volatility or fluctuations in the net asset value of the Fund. A relatively small movement in the value of a derivative's underlying investment may have a larger impact, positive or negative, on the value of a fund than if the underlying investment was held instead. The use of derivative contracts may help us to control Fund volatility in both up and down markets by hedging against the general market. The use of derivative instruments that may result in higher cash levels. Cash may be deposited with several credit counterparties (e.g. international banks) or in short-dated bonds. A credit risk arises should one or more of these counterparties be unable to return the deposited cash.
DISCLAIMER
This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID), which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. Always research your own investments. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.
This should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, forwarded, reproduced, divulged or otherwise distributed in any form whether by way of fax, email, oral or otherwise, in whole or in part without the express and prior written consent of Liontrust.
