Thomson Tyndall Investment Thoughts 2024 Review and 2025 Outlook

January 7, 2025

Looking back over 2024, with most sectors showing strong returns, it is easy to forget the uncertainty that had to be weathered throughout the year, with speculation around the direction of inflation and interest rates, elections taking place across the world, as well as continued conflicts in Ukraine and the Middle East. Despite this, markets have been remarkably resilient, with the S&P 500, FTSE 100, and several other major indices finishing the year near record levels.

Whilst these main areas of uncertainty all played a part in the market return dynamics and volatility of 2024, the area that was watched most closely by investors was inflation and Central Bankers’ interest rate decisions. The objective for Central Banks was to achieve a ‘soft landing’ – that is getting the balance of interest rates just right to bring inflation down towards target levels without pushing the economy into recession. The data seem to be telling us that they have, so far, been successful in achieving this ‘soft landing’ – something most market commentators considered to be unlikely this time last year.

That said, it is important not to declare inflation as having been conquered prematurely. History tells us that interest rates take time to feed through to the real economy – so economic slowdowns are not impossible from here – and there are a number of external factors (e.g. Trump) that could cause inflationary pressures to return. When structuring portfolios, the risks of reflation and recession are factors we have been very conscious of over 2024 and will remain a key focus for 2025.

Equities

Whilst gradually falling interest rates across the world have provided a following wind for most asset classes, the re-election of Trump in November was a catalyst for a sharp upturn in performance of the US market, as well as more speculative ‘assets’ such as Bitcoin and other cryptocurrencies. This is due to the assumption that a Trump government will be business friendly with potentially lighter regulations and the understanding that the value of the stock market is something that he uses directly as a measure of his success.

We think that there is some merit to this theory and US equities may continue to do well, however, we expect US equity returns to come from a broader range of companies rather than the seven largest companies which have accounted for around half of the return of the S&P 500 in 2024. This includes small and mid-cap companies which are trading at much more attractive valuations than some of the largest companies and may benefit from increased domestic demand if Trump’s tariff rhetoric becomes reality.

We are not able to invest in cryptocurrency, so we do not worry too much about the investment case or fair value of different ‘coins’, however, extreme growth phases for crypto and other speculative assets have historically proved to be a useful bellwether for markets getting ahead of themselves. We are keen to avoid having too much exposure to parts of the equity market (more easily valued through cash flows and profits) that look conspicuously expensive but must balance this with owning sectors that are poised for good long term growth. The perennial challenge is finding this balance, avoiding unnecessary risk whilst participating in good growth markets.

Despite bold claims in the run up to the election, the growth picture is less clear in the UK, which has not helped short term business confidence. However, having been out of favour with investors since Brexit, the market is now trading at very low relative valuations. In addition, the UK stock market has a considerable weighting to companies operating in the service sector, which should be less affected by US tariffs, and offers a high dividend yield (for a developed market) providing good defensive qualities in uncertain markets. This means that the negative perception of UK equities could well change, and we think there are a number of very interesting sectors trading at compelling valuations both on the defensive side and within small and mid-cap, which should be a good driver of long-term growth.

Europe continues to struggle with political uncertainty in many of its major economies which, as we have seen in the UK in recent times, does not always provide a good environment for investor confidence. That said, much like the UK, the European market looks quite cheap relative to the US and contains a good number of high quality, well capitalised companies. Weak Chinese demand has been a significant problem for European markets recently due to the reliance of high-end consumer brands, such as those within the LVMH stable. It is unclear when Chinese demand will recover, however, when it does, we expect to see good growth potential here.

Whilst China is still struggling, the stock market has started to recover. We remain cautious of direct exposure given the difficulty in accurately pricing political risk and as the country remains firmly a priority target for Trump which could cause further headwinds. Rather than allocating to China directly, we prefer to have a more dynamic exposure through Asian and Emerging Markets equity funds, where the manager has sufficient latitude to allocate within China and the peripheral markets rather than having a fixed exposure to Chinese equities through a specific China fund. This also allows us to have a growing exposure to the parts of the Asian market that are growing well, such as India and Vietnam.

Fixed Interest

The traditional diversifier from equities, Fixed Interest is a very large sector and there is much of it that we still consider too expensive and risky to offer good downside protection for portfolios. We still think that carefully selected investment grade corporate and government debt offer good risk adjusted income levels and should also provide some protection in a recession now that interest rates are higher, with the potential to be cut.

Credit spreads (the additional return that investors demand for owning bonds from less credit worthy companies and governments) remain extremely tight. There is always a temptation to increase yield by reducing credit quality during positive markets. If you had owned high yield bonds in 2024, your returns are likely to have been good and defaults low, however, this is not when you should be looking to the non-equity part of your portfolio for high returns. It is when times are tough, that you will be pleased to have a well-diversified portfolio of high-quality bonds to provide downside protection, and even better when you can own them at a very similar yield to the lower quality part of the market, such as now!

Alternatives & Absolute Return

‘Alternatives’ is a broad sector of non-equity investments, including infrastructure, commodities and renewable energy, that can provide useful diversification (and often high incomes) from real assets that should have a lower correlation to stock markets and market cycles. We like to have some allocation to provide further diversification to the non-equity part of your portfolio and we are particularly interested in certain parts of the infrastructure space that seems to be trading on quite wide discounts, whilst offering relatively high and stable income levels.

We couple this with ‘Absolute Return’ funds which are actively managed funds that aim to be defensive and not closely correlated with equities. The managers typically have a relatively free reign to invest across sectors to provide a defensive return, and they will sometimes include funds that can have both long and short positions to hedge/reduce market risk. These funds do not tend to offer much income, however, as part of the defensive non-equity side of the portfolio, can provide fantastic downside protection and real diversification benefits from the other core parts of the portfolio.

Diversification

Something that we mention regularly, but we think remains the key for driving consistent long-term returns, is diversification. This has not changed for 2025. Despite the annual speculation of where the winners of next year might come from, 2025 will inevitably throw out a few curveballs resulting in regular pivots between ‘winners’ and ‘losers’. We think that a portfolio well-diversified by geography, sector and asset class, as well as a disciplined investment process, is critical.

Fortunately, following the painful correction in 2022 and 2023, we think that there are a number of asset classes trading at sensible valuations that should now provide real diversification.

Conclusion

Whilst 2024 has seen strong returns across most sectors, it is crucial not to overlook the uncertainty that shaped the year. Speculation around inflation, interest rates, and global conflicts created volatility, but the resilience of markets was notable. Central Banks are not yet patting themselves on the back for achieving a ‘soft landing’ and a number of the risks we saw throughout 2024 are still very much present for 2025.

Looking forward to 2025, maintaining a well-diversified portfolio remains essential. In equities, we see potential for the US market’s performance to continue, with mid and small-cap US companies looking more attractively valued, and also see good opportunities in parts of the UK and European markets, despite growth challenges.

Within the non-equity ‘diversifiers’, Fixed Interest should offer some downside protection, but still requires careful selection whilst credit spreads remain tight. Alternatives, such as infrastructure and absolute return funds offer more useful diversification and stability, providing defensive qualities during uncertain periods.

Ultimately, 2025, as with every year, will present challenges and opportunities, and we must remain conscious of our (in)ability to predict the future! With what we know about 2025, we feel positive, but think that balancing growth with the ability to defend, staying diversified by geography, sector, and asset class, and focusing on the price we are paying for investments, will remain key to our process for the year to come.

This note is intended as a general market update and should not be regarded as specific advice or treated as a recommendation to invest in any particular fund or asset class. Stock market investments can fall as well as rise. If you would like to discuss the implications for your own portfolio, please do get in touch.