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As we near the end of a year of significant geopolitical uncertainty – including elections for around half the world’s population – Liontrust fund managers outline their investment outlooks for next year. With equity markets’ handsome year-to-date gains owing a lot to AI excitement surrounding mega-cap technology stocks, could 2025 see a broadening of market leadership?
Mark Hawtin: Head of the Global Equities team
2025 could usher in a golden period for stock picking. In our view we are at, or close to, a peak in the massive trend towards passive investing.
The market’s concentration risk is at the highest level in a century. However, the best stock picking opportunities often arise at the same time as concentration risk is maxed out, with the best investment returns accruing not necessarily to the enablers of disruption, but from other businesses able to build on the new infrastructure.
The flip-side of current market domination by technology mega-caps is that other key economic sectors such as cyclicals and defensives are reaching record low representation in stock market indices. These segments contain great companies, many of which will benefit from the AI trend, but they are currently ignored by passive investing.
Storm Uru and Clare Pleydell-Bouverie: Co-lead managers, Global Innovation team
In 2024 we entered a golden period for investing in innovation. We believe this opportunity will be multi-year in nature and accelerate into 2025. Technology platform shifts are once-in-a-generation or even once-in-every-other-generation occurrences, and the technology platform shift associated with AI has potential to eclipse its predecessors by an order of magnitude.
The opportunity starts in the technology sector, and this is what we have observed this year: new AI infrastructure getting built and replacing traditional compute in data centres around the world. In 2025 we will see the diffusion of this technology start in earnest across sectors; we are already witnessing early adopters building stronger moats and moving faster than competitors. Software is being re-architected, and industries are being re-written. Investing behind those innovators on the right side of this tectonic platform shift instils us with great confidence in the fundamentals of our company holdings across our funds going into 2025.
Simon Clements: Investment Manager, Sustainable Investment team
As we move into the next economic cycle, investment across the economy will broaden beyond that of AI, which should also translate to more balanced leadership from a stock market perspective. For example, 2025 will see heavy investment into technologies addressing AI’s energy demands.
The return of Donald Trump to the White House introduces new uncertainty. Policies aimed at reshoring manufacturing may boost US industrial growth, leveraging automation to offset higher labour costs. This aligns with broader reindustrialisation themes, but the degree to which tariffs are implemented will be an important determinant of how the global economy grows, and how strong stock market returns are.
The urgent need to decarbonise our economy remains as important as ever, and despite some pushback in political circles, it is reassuring that virtually all the technology we need to decarbonise is in place. We expect strong investment returns from companies which allow us to decarbonise, such as renewable energy and technologies which drive energy efficiency.
Imran Sattar: Portfolio Manager, Edinburgh Investment Trust
Across global markets, risks remain high with multiple volatile geopolitical situations and growth challenges. The re-election of Donald Trump also increases the risk of global trade wars.
Closer to home things appear more sanguine. With Chancellor Reeves’ inaugural budget now in the past, UK consumers can plan their finances with greater certainty, and in any event, they are in better shape compared with a few years ago having retained a greater proportion of savings built up during Covid, particularly when compared to consumers in the US. We are also considering the increase in employer National Insurance rates, which are a modest headwind for the more domestically orientated holdings in the portfolio.
That said, relative political stability combined with lower levels of inflation should promote higher levels of corporate investment. We are finding many opportunities to invest in high quality businesses in the UK market at attractive valuations – both more UK-focused companies such as Dunelm and Rightmove, and more global UK-listed companies such as Haleon and Compass. While keeping an eye on the macroeconomic outlook, we remain focused on bottom-up stock selection and constructing a diversified portfolio. Our confidence comes from the excellent strategic, operational, and financial progress that the vast majority of the companies in the portfolio have made over the last couple of years.
Anthony Cross: Head of the Economic Advantage team
In 2025 we expect to see proactive government policies – particularly around pension funds – being used to promote UK economic growth. Against a background of sluggish economic growth, not helped by tax rises, the need for positive policy action to encourage more investment is stark. We will continue with our active lobbying in support of the idea that UK pension funds should be investing more. We believe that a vibrant domestic stock market is the linchpin of a dynamic economy.
Improved investment flows will have a positive impact upon the valuations of UK-listed companies, which are cheap when compared with overseas markets. Improving valuations should lead to a virtuous circle whereby benchmark-aware investors increase allocations to the UK, more companies seek to list on the London market, and merger & acquisition activity rises, resulting in a positive overall impact on UK economic buoyancy.
Philip Milburn: Co-Head, Global Fixed Income team
As we look towards 2025, one cannot predict exactly what Trump v2.0 will look like, but we can examine his campaign promises and previous presidency to give a little guidance on the impact for bond markets.
Looking at the three main policy fronts, proposed changes to tariffs and immigration are inflationary and bad for long-term economic growth, while tax cuts are the one policy that supports growth. We think the combined effect of these changes will be to imply fewer cuts in 2025 than previously envisaged. The flip side is that with restrictive monetary policy being maintained for longer, the chance of an economic accident occurring increases so the probability of needing loose monetary policy goes up in years beyond 2025.
With so much uncertainty we expect volatility in sovereign bond markets to remain elevated. Valuations are cheap and you are well rewarded for being invested in the market even with delayed rate cuts. For corporate bonds, the outlook is benign for the foreseeable future but with risks further out on the horizon. We are focused on investing in debt issued by companies that can easily ride out any storm that Trump’s policies create.
Samantha Gleave: Co-Head, Cashflow Solution team
We think the outlook for European equity investors is bright, particularly for those seeking out cash generative stocks.
There are three key reasons for our upbeat outlook: valuations are attractive; European markets are still in a technical uptrend; and we see little sign of poor investment behaviour by corporates.
From a valuation perspective, European equities on aggregate are around fair value: not exceptionally cheap but not at stretched levels either. However, when we look specifically at those companies with the best cash flow appeal, we find they look particularly cheap. Ranking the European stock universe in order of their cash flow metrics, the top 20% stocks have only been cheaper twice in the last 30 years – in 2001 and in 2020.
Both of these proved to be excellent historic entry points to the stocks with cash flow appeal, and we think there should continue to be a strong relationship between low valuation at investment and subsequent strong performance.
Connor Godsell: Investment Manager, Sustainable Investment team (fixed income)
The Trump administration’s seeming willingness to use broad tariffs as both a negotiating tactic and a tool of punishment do not augur well for global trade, and both Europe and (to a lesser extent) the UK could see growth falter in their wake.
In light of this assessment, we increased our overweight duration position as UK government bond yields rose in the aftermath of the Autumn Budget. While the Budget delivered bolder decisions than expected, we are sceptical that they will materially impact growth in the medium to long term, while there is also a possibility the Chancellor will reverse some commitments next year to satisfy bond markets.
We still see a slowing labour market and broader economic frailty that should see the UK closer to the eurozone than the stronger US. While we have been wrong on the volatility that has been domestically generated lately, we think the direction of travel remains intact, and as such remain confident in our overweight duration position. Given the broader economic, geopolitical and market landscape, 2025 will likely prove to have its own surprises, and we look forward to navigating those in global bond markets.
James Klempster: Deputy Head of Multi-Asset
There are investment opportunities among smaller companies in the US and elsewhere in the world, along with the UK, Asia ex-Japan, emerging markets and Japan. With the fragmentation of globalisation, moving to a multi-polar world and further potential challenges to supply chains if Trump follows through on his America First pledges from the election campaign, diversification will be more important than ever.
There is also an opportunity for active managers with any broadening of share price growth beyond the US mega caps. We do not believe that future growth will come from just seven stocks. Our view is strengthened by the belief that we will gradually move from an investment to an economic story for AI.
The global economy continues to be solid with lowering inflation, interest rates coming down and no sign of unemployment rising significantly in the major economies. For sure, there are many challenges, including the geopolitical risks, high government debt and China trying to stimulate its economy, but there are also lots of opportunities for investors.
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