Outlook 2025: Why the biggest market risk is taking no risk at all

I’m sure many of you will be familiar with the term the Wall of Worry. This is the tendency of financial markets to increase even as economic, political, or social conditions suggest that they should be falling.

It’s a totally logical feeling to be scared of stock markets when they are at an all-time high – but the reality is different. Take the US stock market (which accounts for 60% of the global economy) as an example - investing at market highs for the past 100 years would actually have been a profitable strategy.

Figures from Schroders show that from 1926 to 2023 the 12-month returns following an all-time high being hit have been better than at other times: 10.3% ahead of inflation compared with 8.6% when the market wasn’t at a high. Returns on a three-year horizon have also been slightly better on average (7.6% vs. 7.5%)*.

There are two points of note. Firstly, markets reach all-time highs a lot more than people think. Of the 1,176 months since January 1926 to December 2023, the market was at an all-time high in 354 of them, 30% of the time*.

Secondly, and perhaps more importantly, both US and global markets were at all-time highs in December 2023**. But if you’d have invested in them at the end of last year, you would have made returns of 29% and 23% respectively***. It all goes back to the old adage – time in the markets not timing the markets.

Please remember that the value of investments will fluctuate and returns may be less than the amount originally invested. Tax treatment depends on your individual circumstances and tax rules can change. Chelsea does not offer advice and so if you are unsure of anything please contact an expert adviser.

An incongruous 2024 has been shrugged off by markets

This year has been incongruous to say the least. It has been dominated by monetary policy and growing geopolitical tensions. The former has left markets in a malaise as forward guidance (an unconventional investment tool designed to give some insight on what central banks are thinking) was thoroughly exposed, with central banks’ rate cutting plans often swayed by the latest data point.

Mixed signals on monetary policy make investing challenging and although we are starting to see rate cuts, they are unlikely to be as aggressive as many thought at the start of 2024. Geopolitical tensions have steadily worsened throughout the year with conflict in the Middle East, the ongoing war between Russia and Ukraine, and the growing concerns about US trade tariffs.

Volatility has also been present throughout 2024. A good example of that was in early August when we saw a sharp correction, as disappointing jobs data in the US – in tandem with the unwinding of the carry trade in Japan – acted as a catalyst for a market sell-off amid fears of recession.

But despite all of this, markets continued their forward march. This continues to be led by the tech behemoths at the top of the US market. The S&P 500 has continued to go gangbusters, having risen 53% since the start of 2023 with Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla — known as the Magnificent Seven — accounting for 30% of the index****. But it should be noted the market has broadened out to some degree, with financials – not tech – the best performing US sector in 2024. You could argue a lot of US large-caps now look expensive, but those tech companies look particularly pricey.

There are concerns that US equities are now looking expensive, particularly at the top-end. But if investors had not invested in those markets in the past 10-years, they would have given up huge potential returns. So it is all about finding that balance between backing these growth stories without becoming over reliant on them.

US stocks got a further boost from Donald Trump’s presidential election win in November, another element which is likely to keep markets on their toes in 2025. Trump’s way is to threaten things and then pull back. For example, many believe he will not impose the level of tariffs he has threatened, but will use it as a bargaining chip. He wants Europe to fall into line over policy towards China and wants Mexico to stop letting people across the border – in both instances he will use tariffs to impose his will.

Where should I look in 2025?

Rock solid global equities

Two options for those who want a solid performer that offers you exposure to some of the world’s largest companies would be T. Rowe Price Global Select Equity and Rathbone Global Opportunities.

T. Rowe Price Global Select Equity is an unconstrained, high-conviction fund that scours the globe searching for the best opportunities. This style-agnostic fund is designed with a strong risk management framework in pursuit of creating a portfolio that looks to outperform over a full market cycle. It has names like Ely Lily, Amazon and Microsoft within its top 10 holdings^. Having launched in 2022, the fund has returned 27.2% in the past three years^^^.

Rathbone Global Opportunities looks for innovative growth companies of all sizes: these businesses tend to be differentiated, scalable and have sustainable growth. Under the management of James Thomson it has returned 84% to investors in the past five years^^.

Unloved UK small-caps

Those looking for an area where there is value should consider UK smaller companies. The UK finally has stable politics but has also gone through a brutal Autumn Budget, which is likely to raise unemployment and curtail pay increases for many workers. But there is hope for a market which has seen £50bn of outflows since Brexit in 2016^^^^.

We have been adding to UK small-caps within our VT Managed Range of funds as we feel the valuations are still compelling. We’ve survived the Budget, M&A activity is growing and we continue to see companies buy back their own shares -a major giveaway that they believe their own businesses are cheap.

One to consider here is Fidelity UK Smaller Companies. Managed by Jonathan Winton this is an out-and-out value fund, targeting out-of-favour companies that have gone through a period of underperformance but where the team believe there are unrecognised growth opportunities. The fund has returned 56% in the past five years, despite a challenging economic backdrop^.

Income options – global equities and fixed

Those who consider income an essential part of their investment profile could look to a global equity income offering like Guinness Global Equity Income, which has not only returned 75% to investors over five years^, but also offers a dividend yield of 2.6%^. The fund has a concentrated portfolio of 35 stocks of equal weights. The managers focus on high quality stocks with balance sheet strength.

Another alternative would be a go-anywhere fixed income vehicle, like TwentyFour Dynamic Bond. Bonds continue to offer an attractive income, but most of that is from the government bond rather than the spread. Nevertheless, the all-in yields are attractive and further rate cuts can boost the spread, while also offering the potential for capital gains. The team on this fund have an excellent record of investing across the fixed income spectrum and the fund has a very attractive yield of 6.8%^.

*Source: Schroders, 15 February 2024
**Source: FE Analytics, total returns in pounds sterling, 4 January 1988 to 6 December 2024
***Source: FE Analytics, total returns in pounds sterling, 29 December 2023 to 6 December 2024
****Source: Financial News, 22 November 2024
^Source: fund factsheet, 30 September 2024
^^Source: FE Analytics, total returns in pounds sterling, 6 December 2019 to 6 December 2024
^^^Source: FE Analytics, total returns in pounds sterling, 6 December 2021 to 6 December 2024 ^^^^Source: Investment Association, Net retail sales of funds by asset class

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and fund managers and do not constitute financial advice.