Stock markets in 2024 were dominated by a handful of tech-centric names in the US with the flow of capital into AI-related themes being a powerful driver of returns. The top 10 companies (by market cap) accounted for a record 37.3% of the S&P 500’s market capitalisation. Indeed, 26 stocks now account for half the entire value of the S&P 500. This has in turn led to the US market forming an ever-increasing proportion of the global market; US stocks now make up two-thirds of the MSCI All-Country World Index.
This article will discuss a handful of themes to think about for 2025.
Exceptionalism isn’t the norm
The past decade has seen the regular outperformance of both the US stock market and economy, meaning it can be difficult to envisage periods where this is not the case. But it happens; markets don’t outperform forever.
In the early noughties, the US experienced a decade in the doldrums following the unwind of the dotcom boom, a phase in markets that seemed as unstoppable as the AI behemoths today. Global pools of capital that can flow to any corner of the world’s capital markets can break the reflex of buying US stocks and can, instead, seek out cheaper opportunities. If the notion of a market’s exceptionalism means anything, it is surely that it can’t be the norm.
Big doesn’t have to be beautiful
Large market capitalisation companies generally should be considered less nimble and adept at providing pro-cyclical returns. Smaller companies are generally considered to be higher risk and, therefore, should be more rewarding over the medium to long term.
This so-called risk premium - a return that should accrue to those willing to weather the additional volatility of small cap companies - has been notably absent in recent years. In fact, in many ways, smaller companies have been penalised by the market due to their perceived riskiness despite their fundamental flexibility, entrepreneurship and dynamism.
Conversely, large capitalisation companies, which are, generally, far harder to run with entrepreneurial verve and flexibility should trade at a valuation discount to their smaller counterparts. The stodginess, which is an inevitable consequence of large companies’ size, is a virtue in the sense it should provide a consistent foil to the vacillations of small cap companies and yet some of the largest companies in the world are currently trading at what can best be described as speculative valuations. These valuation levels – such as price earnings ratios that are multiples of long-term norms - may make sense if applied to small and hyper nimble companies whose profitability is doubling, trebling or even increasing 10-fold. But when they are applied to companies whose revenues and profitability have already increased in an exponential way to levels that dwarf the GDP of small countries, a note of caution is sensible.
Massive momentum opens up active opportunities
The momentum in markets has been breathtaking in the past couple of years. The human desire to keep up with the pack – otherwise known as FOMO - is a powerful force. Momentum trades work because they draw in capital and this can create a self-fulfilling, virtuous cycle. The more focused these flows become, the greater are the opportunities for active managers to operate in the areas of the market and asset classes that are out of favour and are less frothy.
Popular investments are rarely cheap. But cheap investments offer excellent long-term returns prospects. Looking to invest in unloved corners of markets can also reduce overall portfolio risk because you are investing in assets that are priced for less good outcomes. Portfolios that are priced for perfection have plenty of scope for disappointment.
Patience pays
Over the short term, markets can be volatile and driven by sentimental forces such as fear and greed, whereas over the longer term, fundamentals such as valuations and the economy have greater influence on market returns. Historically, investing over the longer term has reduced the impact of market volatility and increased the proportion of time that investments are in positive territory.
The turning point for markets – sometimes referred to as an “inflexion point” – often comes when news flow is negative. To illustrate this, the two best days for the UK stock market over the past 40 years were in the shadow of Lehman Brothers going bust in 2009 and the Covid lockdown in 2020, neither periods that were positive. The stock market turns long before the news does and investors who have sold would need a mighty strength of character and conviction to reinvest with perfect timing.
KEY RISKS
Past performance does not predict future returns. You may get back less than you originally invested.
We recommend this fund is held long term (minimum period of 5 years). We recommend that you hold this fund as part of a diversified portfolio of investments.
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The Funds and Model Portfolios managed by the Multi-Asset Team may be exposed to the following risks:
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- Index Tracking Risk: The performance of any passive funds used may not exactly track that of their Indices.
- Any performance shown in respect of the Model Portfolios are periodically restructured and/or rebalanced. Actual returns may vary from the model returns.
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DISCLAIMER
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It 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.
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