Change is in the air
Change is easy to notice when there are demarcation lines such as elections. Last year saw half the world’s population heading to the polls, resulting in expected and unexpected changes. What ties them altogether is a recognition that the previous system of free global trade and limited government intervention no longer works well enough for everyone.
The UK election was won by Labour campaigning on a single word, ‘change’. In the US, Trump won the election on the same premise. In France, Jean-Marie Le Pen has capitalised on public discontent with the status quo and in Germany, the centrist coalition government collapsed after failing to address the slowdown that has gripped Europe’s industrial powerhouse.
From this, we can garner some guiding principles. Governments will play a growing role in shaping the economy through support and incentives for some industries. There will be greater emphasis on industrial self-reliance and national security. And there will be greater protection and promotion of national corporate champions.
Interest rates and inflation
We believe the key determinants of the investment environment continue to normalise. While geopolitical ambitions could change the composition of national economies, we expect most western countries to continue around their current trend growth rates, with the US slowing slightly, but still outpacing Europe and the UK.
Although the latest readings for inflation are worthy of some concern, we expect the level in western economies to hover between 2 – 3%. This is higher than official targets around 2%, so we do not foresee a return to the super-low interest rates seen in the post-global financial crisis and post-COVID periods. Instead, we expect a wider range of interest rates around a higher average. In the short term however, we think there is room for interest rates to come down slightly, but perhaps to a lesser degree than the market had been expecting at the end of 2024.
At the margin, falling interest rates should create incentives to invest cash elsewhere, either in higher returning assets or in bonds.
Corporate earnings strength continues
The last decade of investing can be summarised as, ‘American exceptionalism’. The US has outperformed peers, driven by robust corporate earnings in innovative technology focused businesses. Lately the market has been dominated by the handful of US tech companies dubbed the ‘Magnificent-7’ which are global leaders in semiconductors, cloud computing and artificial intelligence.
Looking ahead, in the near term and after a long period of subdued earnings and lacklustre performance, we think there is scope for stronger earnings growth in other parts of the market given the broad resilience of the US economy. US technology companies are still expected to lead the pack, but the gap is closing, leading to more balanced growth in US stock markets.
In Europe & the UK, the healthcare sector is expected to enjoy strong growth driven by a combination of factors. Global aging populations creates a reliable source of demand growth for healthcare services, pharmaceuticals, medical devices and long-term care. Innovations in biochemistry, molecular biology, genomics, artificial intelligence and digital care are driving new treatments and care models, creating growth opportunities for companies across the sector.
Earnings growth in Asia and emerging markets is expected to surpass that in the US. With substantially lower valuations, we would ordinarily be incredibly excited about the long-term investment opportunity. Holding us back is recognition that these higher earnings expectations have a high degree of uncertainty associated with them, given geopolitical forces and hitherto unsuccessful attempts to reaccelerate the Chinese economy. As such, we prefer to invest selectively and cautiously in this region.
Heading into 2025: What are we excited about?
Exponential technologies are those that enable change at a rapidly accelerating, nonlinear pace.
Consider how computers in the early days were huge machines that could only perform simple calculations. Thanks to exponential growth, the smartphone in your pocket is a millions times more powerful.
There are five areas to keep a keen watch on this coming year as they have promising and near-term capabilities to transform lives.
1) Machine learning & generative artificial intelligence
Machine-learning models have demonstrated increasingly sophisticated understanding and generation abilities. Recent developments include multimodal models that can process text, images, and audio simultaneously. Advances include long-context processing which moves these models away from short form prompts and towards presenting lengthier, complicated problems. More robust reasoning abilities give these models enhanced problem solving skills with more natural and engaging conversations.
2) Quantum computing: from theory to practice
We are close to understanding where quantum computing moves from theory to practical application. If achievable, then the potential applications for in drug discovery through molecular simulation, climate modelling, materials science and optimisation problems in logistics and supply chain management are very exciting.
3) Advanced robotics
Robotics has enjoyed improvements in mobility, dexterity, and intelligence with some companies focused on developing highly capable humanoid robots that can work in manufacturing & assembly, construction & infrastructure maintenance, domestic assistance and elderly care.
4) Healthcare innovation
Alphabet’s AlphaFold has revolutionised protein structure prediction with unprecedented computational accuracy. This breakthrough has accelerated drug discovery and improved our understanding of disease mechanisms. Advanced genomic sequencing and AI-driven analysis are enabling more personalised treatments while internet connected devices are enabling better remote patient monitoring and early disease detection.
5) The energy transition
The transition to a less carbon intensive energy system involves several technologies. Within renewables, solar cells are steadily increasing their efficiency while costs are declining, leading to rapid expansion of solar capacity around the globe. Improved technology is leading to more efficient wind turbines that can generate more power from the same wind resource. Battery capacity and energy density are improving exponentially, making energy storage more affordable and practical for grid-scale applications and electric vehicles.
AI and machine learning are being applied to energy assets, analysing data to predict equipment failures, optimise maintenance to reduce downtime. AI is also being used to optimise the operation of the electricity grid, allowing better integration of variable renewable energy sources.
Holding a balanced portfolio is key
With that backdrop, our portfolios are positioned close to their long-term strategic asset allocation, in recognition of the broadly positive outlook for corporate earnings, especially in the US given its economic resilience. The potentially sticky inflation and a higher interest rate environment mean we should expect continued volatility in markets as they adjust to the new regime. Geopolitics could also add to market volatility through various trade restrictions.
This environment provides fertile hunting ground for active management, but there are meaningful risks which sees us look to limit the degree of deviation from market indices. Finally, we maintain our highest convictions with the long-term exponential growth opportunities that we believe have the potential to reshape tomorrow’s world.
Any questions?
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Please remember, this content is provided for information purposes only. Investment involves risk. Past performance is not a guarantee or indication of future results. Investment return and the principal value of an investment may go up or down and may result in the loss of the amount originally invested. All investors should seek professional advice prior to any investment decision, to determine the risks associated with the investment and its suitability.
