Most investors make a New Year’s resolution to renew their portfolio. But in 2025, an unusual amount of uncertainty surrounds this annual transformation.
How will President-elect Donald Trump’s plans for tariffs – in the US and around the world – play out?
Will new companies emerge to slow the rise of the big tech companies fueled by the generative artificial intelligence (AI) revolution?
John J Hardy, chief strategist at Saxo Bank, claims that 2025 will be a year of ‘big questions’, but it will also be a year of excitement.
“We are entering a new era,” he says. ‘Old economic models are falling apart, but this creates opportunities.’
What’s the best way to make the most of these confusing conditions?
Top markets: The US performed best by a clear margin, with Germany in second place in 2024
Be optimistic, says Mike Fox, head of equities at Royal London Asset Management. “This does not mean that investments can only grow,” he adds.
‘It is clear that not in some years.
But in the long run, societies improve, economies grow, innovation thrives – and optimism wins.’
If you like this line of thinking, here are the themes predicted to determine the direction of the major stock markets in the coming months.
America
Donald Trump will be sworn in as US president on January 20 and will then begin implementing policies that include imposing import tariffs and cutting the federal budget by $2 trillion (£1.6 trillion), with the help of Tesla boss Elon Musk.
The scale of the undertaking is huge, but there is a belief that the results could be profitable.
Niamh Brodie-Machura, co-chief investment officer at Fidelity, believes that US corporate profits will exceed those of other developed countries, ‘reinforcing American exceptionalism’.
Rathbone Asset Management stresses that investors should be prepared for disruption: ‘It’s Trump, so it’s reasonable to expect some good, some bad – and some wild.’
Donald Trump: Policies include imposing import tariffs and cutting the federal budget by $2 billion
Peter Branner, chief investment officer at Abrden, warns that it would be dangerous to underestimate the extent of the disruption.
In this context, Rathbone argues that ‘US stock prices may not be cheap, but they are not expensive either’, adding that growth should come from a combination of ‘tighter finances, less bureaucracy, more private enterprise, cheaper energy and lower interest rates’.
In 2024, the best way to cash in on American exceptionalism was to back the tech stocks that make up the mega-cap Magnificent Seven – Google owner Alphabet, Amazon, Apple, Meta (the Facebook and Instagram group), Microsoft, Nvidia and Tesla.
The Magnificent Seven should continue to dominate, but Goldman Sachs Asset Management urges investors to look beyond this group if they want more exposure to the generative AI revolution.
For example, semiconductor group Broadcom, which designs processors to accelerate AI systems, is considered the ‘new Nvidia’. Stjepan
Yiu, manager of the Blue Whale Growth fund, says Nvidia, which is already a $3.3 trillion company, could hardly raise another 50 percent. As a billion-dollar company, Broadcom has a better chance of such expansion.
For a broader bet on an ‘America first’ strategy, consider an investment trust like JPMorgan American, which holds Apple, Meta, Nvidia and Trane Technologies, which builds cooling systems for the massive data centers on which the AI revolution relies.
Mike Fox of Royal Asset Management describes the construction of these centers as a ‘once-in-a-generation investment boom’.
McDonald’s is another holding company. Jack Caffrey, the foundation’s manager, says the fast-food chain has an ‘iconic, quintessentially American brand – and a very defensible model’. A third of the American population eats there every week.
Smaller US companies are also worth your consideration in light of BNP Paribas’ forecast that their profits could grow by 30 percent in 2025 and 2026.
Artemis US Smaller Companies and Premier Miton US Opportunities are the specialist funds of choice for taking advantage of potentially profitable disruptions in this sector. Trump’s desire to deregulate takeover rules could produce merger mania.
UK
Concerns over the fallout from the autumn budget, inflation and borrowing costs look set to weigh on UK markets.
But the darkness is not all-pervading. On the one hand, since our manufacturing sector is small, Trump’s tariffs should affect us less. As many as two-thirds of respondents in a Jefferies survey expect the FTSE 100 to rise in 2025.
Analysts say many UK companies have strong balance sheets – and generate cash. This suggests they should be more resilient if interest rates stay higher for longer and inflation proves sticky.
Guy Anderson, manager of the Mercantile Investment Fund, sees reasons to be happy in the country’s low unemployment, real wage growth and low level of household debt.
Given these factors, Anderson is optimistic about the outlook for homebuilders such as Bellway. Since the budget, shares in those companies have fallen on doubts about the government’s construction targets, but are now starting to look oversold.
The perception that UK stocks are a bargain could mean another flurry of takeover activity, following this year’s merger mania, with £52bn of deals for British companies completed by the start of November. FundCalibre suggests the TM Tellworth UK Smaller Companies fund as one way to capitalize on this trend.
As 2024 draws to a close, the focus on the US is said to mean UK markets are no longer ‘relevant’. Carl Stick and Alan Dobbie, fund managers of Rathbone Income, want to reject this idea, choosing to champion the cause of UK plc as a source of dividends for millions who invest primarily for income.
AJ Bell predicts FTSE 100 members will pay out £83.6bn in dividends in 2025, up 6.5 per cent on 2024 – and a new record.
Europe
Enthusiasm for continental Europe will be difficult in the coming months. Germany, a former EU powerhouse, was in recession in name only, while France is politically closed and faces fiscal problems of such magnitude that Abrdn argues it should be seen ‘as a peripheral market, not a central one’.
This sounds unappealing, but contrarian investors may think otherwise. Jules Bloch, co-portfolio manager at JPMorgan European Discovery, says valuations of European smaller companies are ‘some of their most attractive since 2012 – interest rates have peaked, real wages are rising and consumer sentiment is improving’.
Bloch claims these companies include the following winners in artificial intelligence and drug-assisted weight loss. The meteoric rise of Novo Nordisk, maker of Ozempic and Wegovy, was halted this month by poor results for its new drug Cagrisema. But a more obscure Danish company is waiting in the wings: Zealand Pharma, whose products also include a slimming treatment.
The troubles of France and Germany overshadowed the return in Spain, whose Ibex index rose by 13 percent this year, and in Italy, where the Borsa Italiana rose by 10 percent.
The European Smaller Companies trust is a way to take a stake in the recovery of the beautiful south – and recovery elsewhere.
China
China will be the primary target of Trump’s tariffs. But there are signs that Beijing is gearing up for a trade war, preparing to strongly boost consumption, improve investment efficiency and boost domestic demand. The world’s second-biggest economy will seek to arrest its decline by issuing three trillion yuan (£327bn) of bonds to fund innovation.
But betting on a successful outcome will require strong nerves, in light of this year’s failed stimulus packages.
Still, according to John Citron of JP Morgan Emerging Markets, China’s advanced manufacturing and electric vehicle sectors are thriving thanks to government policies that appear to be effective.
BYD, the electric vehicle maker, is on track to sell more cars than Ford or Honda by 2024. Its shares have jumped 634 percent since 2019.
But analysts still rate the stock a ‘buy’.
Could a combative Trump (pictured) block BYD’s progress? Or will the company continue to move faster than European automakers in 2025?
That’s one of the things investors will be watching in 2025 – a year when no one can presume to have all the answers
