Monthly Market Outlook
Our Three Big Investment Themes for 2025
January 2025
As we welcome a new year and look forward to what it may hold, the Manager thought it would be a good time to remind you of how they approach investing here at atomos.
When we consider the balance of opportunity and risk in investment decisions, we think about both ‘micro’ and ‘macro’ investment themes. Microeconomics is all about how companies and individuals make decisions in response to what’s happening in the wider world. It could include supply and demand dynamics, production, consumption, and pricing. Macroeconomics is analysis of big-picture economic data such as interest rates, inflation, GDP growth and unemployment numbers.
These themes help us to look for the most important macro forces and help us to understand what is likely to drive outcomes in markets over the next year. Where assets aren’t fully pricing in our expectations, this creates opportunity.
The Manager has identified three themes they think will be important for investing in 2025:
Theme 1: The US business cycle
The Manager thinks the US economy will once again perform well this year. The Manager expects annual real GDP growth to be in the 2.2% to 2.5% range, above the long-term trend for the US. Core inflation is likely to still be around 2.5%, sufficiently close to the Federal Reserve’s 2% target. The US labour market is more balanced, wage growth has slowed from an elevated level but is still robust, and household balance sheets are strong. US business investment is likely to be supported by good consumer spending growth and the artificial intelligence theme which dominated 2024. The Manager expects the Federal Reserve to continue to ease policy gradually in 2025, which should underpin good US economic and corporate earnings conditions. This macro environment is typically good for the performance of assets like equities and corporate credit. The Manager is happy to take some investment risk in the US given this positive outlook but, with some stocks looking expensive, it’s important to be selective. For example, we like US small-cap equities, as well as the more typical larger US companies.
Theme 2: Japan, The Outlier
Japan is in a hugely different economic place to the other major advanced economies. Macroeconomic conditions are more consistent with inflationary pressures building in a healthy way and a need for the Bank of Japan to gradually tighten monetary policy. This means it has been raising interest rates where other central banks have been cutting. That is quite the change compared to the last couple of decades. At the same time, the Manager sees several factors that should support Japanese stock prices this year:
- our outlook for good economic growth in Japan in 2025,
- the positive impact of improving corporate governance on company earnings,
- and government policies to support domestic equity investment.
Theme 3: Divergence in Key Economies
The global inflationary forces that led to an almost universal tightening of monetary policy across advanced economies have unwound. These economies are now growing at vastly different speeds, face different inflationary pressures, and will have different government and industrial policies in 2025. This will continue to lead to different responses by central banks in terms of the pace at which they cut interest rates. This creates potential investment opportunities in government bond and currency markets.
Portfolio Strategies for an Unusual Environment
The Manager thinks investors faces two important conditions today. Firstly, we are in an unusual business or market cycle compared to recent memory. Unusual how? Because central banks – in this case the US Federal Reserve – are cutting interest rates while growth is good. It is even more unusual for a ‘soft landing’ to be achieved – that is, an economic environment in which growth settles around trend and inflation is around the central bank’s target.
Secondly, the Manager thinks the possibility of major long-term or structural shifts in the economic environment is higher. This could be from artificial intelligence-related innovations affecting economies and companies, escalating conflict between countries, or climate change and its increasing impact.
In this environment, what can we do to improve our chances of portfolio success? Here are two big-picture examples:
- Use multiple approaches to measure risk, such as scenario testing and projections, and reverse stress-testing. These are likely to yield richer and more useful insight than using a single approach in isolation.
- Accept uncertainty. There is no ‘magic bullet’ to removing risks. However, a fixed investment strategy is less likely to produce the best return outcome as it will only work well in some environments. Instead, changing exposure to areas of concern, trading through events, and hedging can capture opportunities, add value, and minimise losses.
Sector in focus: Global real estate
Listed real estate includes publicly-traded companies or trusts that invest in property assets, providing exposure to the real estate market via stock exchanges.
The overall sector has become less predictable in recent years, with wider differences in performance across the different sub-sectors. This is partly due to the challenges faced by retail and office buildings since the pandemic, and partly due to strong performance in industrial, residential and alternative sectors such as self-storage and healthcare properties.
Data centres and tower companies have gained prominence compared to traditional sectors, as real estate adapts to changing demand patterns such as increased connectivity and demographic shifts.
Looking forward, the Manager sees opportunities and favourable pricing in sectors like healthcare, supported by an ageing population, and residential, where there is not enough supply in many areas. Office markets face mixed challenges, but potential interest rate declines could improve value, while inflation-linked rents provide stability.
Our Current Investment Thinking
Equities
We think there is potential for more growth from global equities than bonds in the near term, especially in the US where upcoming policies from President Trump should stimulate the economy.
Bonds
We are less favourable on US inflation-linked government bonds this month because we see better value in equities currently.
Alternatives
We maintain investments in alternative assets such as infrastructure and real estate as a way to diversify returns and improve portfolio resilience.
Stock Highlight of the Month: Zoetis
Zoetis is the global leader in animal health, focusing on the discovery, development and manufacturing of medicines, vaccines and diagnostic products and services. It has a diversified business, selling products for livestock and pets across seven major product categories. It makes brand-name products such as Stronghold, a spot-on flea and worm treatment for cats and dogs. Parasiticides provide nearly 25% of total revenue, with vaccines about 20% and dermatology over 15%.
Information correct as of 3rd January 2025.
Looking ahead, we expect to see powerful trends across animal health that will support demand for Zoetis’s products and services as the industry leader. Recent large increases in spending on research and development point to a coming wave of innovation which could boost the company’s growth over the next few years.
Source: atomos.
atomos is the trading name of Atomos Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Atomos Investments Limited is registered in England and Wales, No: 2041819. Registered office: 2nd Floor, 5 Hatfields (alto), London SE1 9PG.
The information and opinion contained in this Monthly Commentary should not be treated as a forecast, research or advice to buy or sell any particular investment or to adopt any investment strategy. Any views expressed are based on information received from a variety of sources which we believe to be reliable but are not guaranteed as to accuracy or completeness by atomos. Any expressions of opinion are subject to change without notice.
Past performance does not predict future returns. Investing involves risk and the value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.
South African Investors: This is a Section 65 approved fund under the Collective Investment Schemes Control Act 45, 2002 (CISCA). Boutique Collective Investments (RF) (Pty) Ltd is the South African Representative Office for this Fund. Boutique Collective Investments (RF) (Pty) Ltd is registered and approved under the Collective Investment Schemes Control Act (No.45 of 2002).
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