Reflecting on the ups and downs of markets in 2024 and sharing his outlook for 2025, Pete Wasko, Senior Portfolio Manager, Copia Capital, tells us why he believes that caution is warranted when it comes to US large cap growth stocks and why valuations of UK equities are compelling.
As we approach the end of another year, it’s easy to forget that there were ever years that weren’t so turbulent – both in markets and in general. The last 12 months have been no exception, with political upheaval taking centre stage. Looking ahead to 2025, we’ll be paying close attention to the impact of both the UK’s Autumn Budget, and of course also the small matter of Donald Trump’s re-election in the US.
Where are we right now?
Looking at where things stand as we close the year, one of the most notable differences compared to 2023 is that, while the US has continued to dominate the market cap landscape – and the headlines, both political and otherwise – it hasn’t been the only game in town. Equity performances in the EU, Japan, more recently in Emerging Markets, and even here in the UK, have all shown signs of life. We’ve seen activity in sectors that have been all but flatlining, like small caps. In fixed income, corporate bonds are leading the charge out of the woods.
And of course, no recap of 2024, would be complete without mentioning that central bank base rate cuts have started across most regions, with Japan the notable exception. At Copia, we’re expecting that to continue into 2025.
Rachel Reeves’ moment in the spotlight
The Chancellor’s first budget was one of the most eagerly anticipated in recent years, not least because of the seemingly interminable time it took to occur.
Following the budget, you be forgiven for thinking the headline issue was Jeremy Clarkson’s farm being brought under the IHT regime. In fact, in terms of its potential impact on the 2025 economic outlook, a far bigger issue is the increase in employers’ National Insurance contributions from 13.8% to 15%. The big question here is, how will this play out? Will businesses decide to reduce costs by freezing recruitment or even cutting jobs, which could impact employment levels? Or will they pass it on to consumers through increased prices, which could mean a return to higher inflation?
Overall, the budget’s impact on the market outlook has been relatively subdued. Cast your mind back to 2022 and the chaos of Liz Truss’s mini-budget, when the FTSE 250 fell nearly 10%, and gilts plunged more than 15%. After the latest budget, despite a modest sell-off of gilts, the picture is nowhere near as concerning.
The return of Trump
Without a doubt, the major event of the year has been the re-election of Donald Trump. It’s hard to predict exactly what the next POTUS will do, but it seems likely that economic growth will be an important driver for some areas of policy. For instance, we’ve heard about plans to freeze the top rate of tax and lower Corporate Tax, which would put more money in people’s pockets and drive higher profitability for businesses. From the talk of de-regulation of key sectors, and fiscal policy remaining expansionary despite the record deficit, it’s clear that austerity is firmly off the table in the US.
The real wild card, though, is tariffs. The best-case scenario is the threat is used as a bargaining tool; the worst-case is 10% universal tariffs and a punitive 60% on Chinese goods. Depending on how this plays out, the impact on inflation and growth both in the US and globally could be significant, with the more bureaucratic EU likely to find high tariffs particularly challenging to negotiate.
Another area of concern is the US debt-to-GDP ratio of 120%, which represents a record high with spending at a level not normally seen except in recessions or periods of war. Interest payments have ballooned to over $1 trillion, surpassing total US defence spending. While this level of spending is currently propping up growth, it will eventually need to be addressed. Whether a Trump administration will do so remains to be seen.
Investment outlook for 2025
So where does this all leave investments looking ahead to 2025? Despite the attention they continue to command, we remain cautious on the much-vaunted US large-cap growth stocks. We see greater opportunity in value and smaller cap stocks, especially as the business environment is likely to be more favourable for them.
And, in the spirit of New Year optimism, we are bullish on the UK. After a tough few years, valuation multiples are lower than any other region, which is reflected in the corporate community with record share buybacks, and significant M&A activity. In short, the smart money sees a lot of embedded value in the UK and if more institutional flows can be attracted back in, this could be a continuing theme even into 2026 and beyond.
