December Wrap Up - 2025 - More of the same?

2024 was one for the record books. It was the second year in a row that the United States S&P 500 share market gained more than 20%, the first time this has happened since 1998. It rang in a new president for the United States. Central banks all around the world, including our own, cut interest rates. And there was significant, almost unprecedented, divergence in markets and stock prices between the haves; the AI focussed stocks, and the have nots; pretty much everything else.

As you are enjoying a relaxing start to your year it's a good time to ponder what 2025 might hold. There will be a lot of predictions shared in newspapers and in the media. Spoiler alert: the more precise those predictions are, the more wrong they are likely to be. Investment success in 2025 will come from ensuring portfolios are well positioned for the broader economic themes that are likely to play out, and through old fashioned investment discipline; not chasing investment fashion, adding to your investments if possible, having patience and taking a genuine long-term approach.

This time of the year is littered with commentaries on what assets will do best for 2025 and what areas of the markets to avoid. The pessimists will be in full voice highlighting every possible risk and the optimists will proclaim the smooth waters ahead. They won’t all be right!

Through years of reading these commentaries (and having made more than a few predictions of our own) we don't put a lot of stores in them. The more precise and more definitive those predictions are, the less likely they are to be right.

That doesn't mean we shouldn't think about what the world might hold in 2025, but that we are better off trying to discern the key underlying themes or trends that will drive the global economy rather than trying to pick winners and losers with millimetric precision. 

ASB partners with global investment giant BlackRock in investing your money. The BlackRock Investment Institute's 2025 outlook paints a fascinating picture.

Their core thesis is that we are entering what they describe as a "very unusual environment" characterised less by a typical business cycle and more by a world that is going through an economic transformation driven by mega forces.

These mega forces will shape market outcomes, economic growth and the world for many years to come. In particular BlackRock calls out transformation as we head towards a lower carbon, but more energy intensive world, as AI becomes ever more present in our daily lives and as ongoing geo-political fragmentation impacts supply chain and security arrangements.

For investors this transformation coalesces into three themes that will inform portfolio construction for 2025.

This global transformation will cost a lot of money.

To fund the AI buildout major tech firm research and development spending now rivals the US government and is still growing. These are big numbers with the top five  technology firms in the US having invested US$224b in the year to 31 March 2024.

And that's just AI spend. As the transformation toward a low carbon world unfolds and to meet increased energy demands BlackRock predicts investment of US$3.5tr each and every year will be required this decade.

Funding this investment won't be easy. It likely means more borrowing by governments and companies and the need for further investment in private assets. This opens up opportunities for investors but may mean the types of investments we have traditionally made might need to change. 

Transformation raises questions about how to build portfolios. BlackRock sees three ways this will influence how we invest.

First they believe more weight should be put on medium term tactical views. In the past, returns fluctuated around a stable long-term trend, it made sense to almost set and forget when building portfolios.

Going forward they are of the view that there will be more variability to these long term trends. This means no single portfolio will work across all scenarios over time. Investors will need to take a dynamic approach. Active strategies backed by insightful investment expertise can provide an advantage in this environment.

Second BlackRock think investors should broaden out where they invest. That may include private markets, and newer asset classes like private credit and infrastructure.

Finally, they think investors should rely less on broad asset classes and instead seek out opportunities shaped by transformational shifts. That makes getting more granular in portfolios important, potentially investing at company rather than country or even industry level. That's especially true as the transformation could change the economy's makeup, reconfiguring entire industries and creating winner take most outcomes.

BlackRock is cautiously confident for 2025,  staying pro-risk and holding more growth assets like shares in portfolios.

This reflects a continuation of the themes that dominated 2024. Specifically, they see continued US corporate strength and hence persistence in the outperformance of US shares. The argument for this is simple. US companies benefit more from mega forces, driving higher earnings. That is supported by a favourable US economic growth outlook plus potential tax cuts and regulatory easing under the new Trump administration.

They have an interesting take on valuations, the price you have to pay for US shares. As we have commented on previously, US share market valuation measures look pricey relative to history. BlackRock argue that this may not tell the full story. The equity market’s changing composition, particularly the burgeoning technology sector, reflects the economy wide transformation taking hold. So, comparing today's market to that of the past is like comparing apples to oranges.

We remain comfortable with the outlook for share markets for now but stay nimble. Key signposts for changing our view include any ongoing surge in long-term bond yields or an escalation in trade protectionism.

This material provides general information only. This material is not a financial product recommendation or an offer or solicitation with respect to the purchase or sale of any financial product in any jurisdiction.

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