The new year is a time to take risks. After all, there is an entire 12 months to achieve all the things you set out to do, whether it is to run a marathon, lose weight or start a new hobby.
In the financial journalism world, taking risks often means putting your neck on the line and making bold predictions. Having already submitted our fund picks for the year, which you can read here, I thought it would be a good opportunity to look at some possible scenarios for the year ahead.
Are these things likely? No. If even one were to take place I would find it remarkable. But it is the things that no one expects to happen that tend to have the biggest impact.
After two months away from Trustnet with no sleep – I was looking after our new baby – I am either benefiting from looking at things with a fresh perspective having been away for a little while, or am blearily staring into all the wrong crystal balls through a fog of tiredness. Only time will tell.
Three Magnificent Seven members will drop 30% or more
There is a real threat that after years of dominating the market, Amazon, Apple, Tesla, Alphabet, Microsoft, Nvidia and Meta could be in for a less-than-stellar 2025.
I do not think all will struggle, but with valuations skyrocketing in recent years there could be the potential for disappointment in 2025. And with how quickly investors can move, any shift lower than outright enthusiasm could bring these stocks back down to earth quickly.
Going one step further, market darling Nvidia could be one of the three that falters. Although competitors are still some way behind, they are catching up slowly and there could be a drop in trading volumes this year. Any sign of weakness could be pounced on by investors.
The US market ends the year down
With the stage potentially set for the Magnificent Seven to come off the boil in 2025, it would stand to reason that the wider American market stumbles too, registering its first loss in a calendar year since 2022 and only its second in a decade.
Of course, this would have knock-on impacts on the rest of the world too, as ‘when the US sneezes the rest of the world catches a cold’.
Emerging markets top the performance charts
If America loses its crown, another region will take its place at the top of the performance tables and emerging markets are my best guess. There was a flash of this last year when China announced far-reaching stimulus measures but more will be needed to prop up Chinese equities, which dominate the emerging markets.
Valuations outside of India – and especially in China – are attractive after a sluggish few years so have plenty of upside potential if things turn around.
Last year, emerging markets were the second-worst place to invest your money. Compared against the MSCI World, MSCI ACWI, S&P 500, Euro STOXX, FTSE All Share and Topix indices, the MSCI Emerging Markets was only able to beat the European benchmark in 2024 with a total return of 9.4%.
The asset class has been battered in recent years from a failure to recover in a timely fashion from Covid, ongoing trade wars between the US and China and latterly, concerns about punitive tariffs. Still, it was the best region in 2020, 2017 and was second in 2016.
UK interest rates fall to 3.5%
At 4.75%, UK interest rates are higher than they have been for more than a decade, but the prevailing signs are that they will come down in 2025.
This time last year, experts expected consistent slashes to the base rate, only to be left disappointed. This time around there is some concern over gilt yields and whether the Bank of England (and government) can afford to cut rates.
But the BofE is still tied to inflation and with that (hopefully) plateauing at a lower level this year, five 25 basis point rate cuts is on the higher end of expectations, but still well within the realm of possibility.
Active managers beat passives
This doesn’t sound that far-fetched but the numbers reveal how truly unlikely this is. Looking at the IA Global sector, the MSCI World has beaten more than 50% of its constituents in eight of the past 10 years, with active managers coming out on top in 2020 and 2017.
If the Magnificent Seven fall from grace then actively managed global and US equity funds, many of which have lower allocations to their benchmark’s largest weights than passive funds, should outperform.
Active managers tend to hunt lower down the capitalisation spectrum for ideas so if mid- and small-caps beat larger companies, that would play into their hands as well.
Moving over to the UK, the FTSE All Share has made a higher return than more than 50% of the funds in the IA UK All Companies sector in seven of the past 10 years. Yet this year, some experts expect undervalued smaller companies to bounce back, which should theoretically favour active managers.