Looking backwards and forwards

This time last year, the world faced challenges and uncertainty with continuing conflict in Ukraine and the Middle East. As well as the election in the UK and US, there were also elections in democracies such as Taiwan, India, Pakistan, Indonesia, and within the European Union.

Despite these headwinds, last year was generally another good year for most markets as the chart below illustrates.

Figure 1: Global investment returns – 2024 and 2023 compared

As in 2023, the US market drove global stock market returns, with the ‘Magnificent Seven’ tech stocks driven by the focus on AI, interest rate cuts and the election of President Trump.  These stocks alone contributed around 50% of the total US market gains of 27%.  The combined developed and emerging markets delivered approximately 19%.  It is always tempting to wish that one was invested only in the technology company Nvidia, the ‘Mag 7’, or the US market, but every investment has its day in the sun and being well-diversified pays off in the longer term.  It is worth noting that investors in US stocks are currently willing to pay over $5 for every $1 of book value, which is at the same record high as in 2000 at the height of the dot.com mania before the crash (for those who can remember that time!).  This is not a market timing signal, but a reminder that some stocks have much demanded of them in terms of the future earnings they are expected to deliver. Maybe they will deliver or maybe not. No one knows.  Well-diversified global portfolios employing allocations to value and size, have a lower concentration risk to the ‘Mag 7’ as a consequence.  Defensive, high quality, shorter-dated bonds delivered around 5%.  UK inflation was down to 2.6% (to November) from 4% in 2023, which is good news.

A 50% growth/50% defensive global balanced portfolio strateg delivered a gross return of about 7% in 2024 which, after UK inflation, grew purchasing power by over 4%.  That is a pretty positive outcome on the back of a good year in 2023.

This time of year is often referred to as investing’s silly season, where analysts, fund managers, and economists make predictions about the markets for 2025. Any sensible pundit should suggest a rise in stock markets, as they tend to go up two-thirds of the time in any given year. Markets, however, reflect known information into prices quickly and effectively and prices will only move on the release of new information, which is unpredictable. Predicting what will happen in 2025 is essentially a bet against the market, implying that the person guessing has better information, or interprets existing information better than the market, which is unlikely. As a long-term investor, you have the luxury of seeing past these short-term, random walks of the markets and the opportunity to pick up the rewards for taking on this uncertainty by remaining invested.

There is no doubt that we are living in turbulent times, from the conflict in the Middle East, Russia’s war in Ukraine, China’s struggling economy and increasingly aggressive stance towards Taiwan, to the forthcoming presidency of Donald Trump in the US.  Pressure on energy prices and a growing concern in bond markets about government debt levels and inflation have led to higher bond yields and the possibility – but not the certainty – that interest rates could remain higher for longer.  Trump’s tariff policies remain an unquantified threat to the global economy and inflation. A just end to the war in Ukraine would be a welcome, if hopeful, outcome for 2025. Uncertainty is the one sure forecast for 2025!

The old saying, ‘hope for the best but prepare for the worst’, is always a good mindset for investors. For those following an evidence-based, systematic approach to investing, starting 2025 with the expectation of positive equity, smaller company, and value premium is sensible. About one-third of the time, we will be disappointed in any one year. However, over time, the likelihood of capturing these premiums increases. Being well-diversified is the key defence against bad times in some markets and sectors, and against specific companies’ fortunes.

It is important to remember that forward-looking views are already reflected in today’s prices.  What comes next, no one truly knows.  As ever, the key is to remain highly diversified, resolute in the face of any market setbacks and focused on long-term goals.

From an investing perspective, as ever, we remain hopeful for the best in 2025 but remain prepared for the worst.

If you have any questions, or want to discuss your individual circumstances with an Old Mill financial expert, please do get in touch by clicking here…