Our CIO John Bai shares his perspectives for markets in 2025.
As we reflect on the economic landscape of 2024, the year will be remembered as the most anticipated recession that never materialized.
Despite the looming shadows of high interest rates and inflationary pressures at the beginning of the year, the U.S. economy showcased unexpected resilience. This strength was primarily driven by robust consumer spending, a welcome decrease in inflation, and the start of the interest rate cutting cycles by central banks globally, which further supported a positive economic outlook.
Equities performed well across regions. At the end of Q3 2024, the MSCI World, MSCI U.S. and MSCI Canada indices all returned over 30% over the previous 12 months. Notably, this success wasn't confined to equities alone; bonds and even Bitcoin recorded gains, painting a picture of a robust risk-on environment. The "Mag 7" technology giants (Nvidia, Microsoft, Apple, Google, Meta Platforms, Alphabet and Tesla) continued to dominate equity returns, buoyed by the ongoing excitement around artificial intelligence (AI). This trend, which started in 2023 and carried into 2024, particularly among hyperscalers, highlighted sustained investor interest in tech-driven growth.
As always in the markets, there are both opportunities and uncertainties on the horizon. We see investment opportunities in sectors and regions that have lagged the markets. The U.S. market has been the dominant force in driving returns; however, we expect to see convergence in growth rates globally as the U.S. slows down from high levels of growth while other major economies like Canada and the Eurozone are anticipated to see improvements in their growth trajectories, with earnings growth projections expected to rebound.
The U.S. market continues to be the most expensive, trading well above its historical long-term average, while other regions are trading at valuations more closely aligned with their historical norms. Given the improving growth prospects and more attractive valuations outside of the U.S., we believe this convergence in growth could fuel multiple expansion outside of the U.S.
We started to see some of this broadening of returns beyond the megacaps in the second part of the year, which has had a positive impact on our NEI funds. It is no secret that market concentration has presented challenges for many active managers over the last few years; however, we believe that 2025 is expected to be a more normalized investing environment where returns are driven by fundamental factors rather than a few dominant sectors or companies. Looking ahead, as this normalization and broadening trend continues, we expect our funds to be well-positioned to achieve strong investment results.
When it comes to uncertainties, in 2025, investors should keep a keen eye on several key indicators. The U.S. labour market's stability, global inflation trends, and Europe's ability to rebound economically will serve as vital signposts. Meanwhile, the result of the recent U.S. election may bring policy shifts impacting domestic and international markets. While a slowing U.S. economy without a recession is anticipated, proposed policies could impact inflation, interest rates, and labor dynamics. Canada's economy, heavily reliant on exports to the U.S., faces risks from potential tariffs and United States-Mexico-Canada Agreement (USMCA) renegotiations, which could disrupt trade and weaken the Canadian dollar.
We still see significant benefits to broadly diversified portfolios, especially in today’s highly concentrated markets. Bonds remain attractive, with rising fixed income yields providing an attractive entry point, offering a buffer against equity volatility and potential economic deceleration. This strategy aims to balance the potential for moderated equity returns with the stability and attractiveness of fixed income investments, ensuring a well-rounded and resilient portfolio.
As we embrace 2025 with optimism, it's crucial that we remain vigilant and adaptable. 2024 was exceptionally robust for equity markets, and not surprisingly, while our expectations for 2025 remain positive, we anticipate growth at a more moderated pace. However, investors should recognize the resiliency of the markets and understand that despite any surprises that may come in 2025, the long-term outlook remains positive. Market pullbacks should be viewed as opportunities for long-term investment, and a diversified portfolio will be key to navigating the evolving economic landscape.
I trust that the following insights from our global roster of sub-advisors, along with our outlook on Responsible Investing (RI) will assist you in making well-informed decisions as you enter the new year.
