Three Views on Markets in 2025

From a market perspective, 2024 was another good year at the index level, with standout performances from China and the United States. South African markets, as measured by the iShares MSCI South Africa ETF, delivered a solid USD return of 7.16%, which was “middle of the pack” from a global point of view.

There are diverging views around where we go from here.

The Bearish view focuses on the continued risk around geopolitics, extended asset prices, US tariffs (on China and the rest of the world), and US tax cuts, which could result in increased US deficits and higher debt levels. American consumers are stretched and are close to being tapped out. Tariffs are a net negative for the US economy and tax cuts do not do enough to bolster demand. Inflation stays sticky. The result is the economy slips into recession and markets reflect that reality by falling around 20%.

The Moderate view holds that President Trump has surrounded himself with a very capable and responsible economic team. In this view, the result will be policies that are not as severe as the election campaign promised. The outcome of this would be a US economy that slows (but not considerably), and where inflation is still sticky (but the trend is lower). In this scenario, markets have a flat to mildly positive or negative year.

Finally, there’s the Bullish view. This holds that the US consumer sailed through the massive ramp-up in interest rates and as a result, should continue to drive US outperformance. The Wealth Effect of higher share prices and property values also keeps consumer confidence upbeat. Lower taxes and deregulation fuel a ramp-up in corporate spending and M&A, which provides a tailwind to US growth. Inflation falls, allowing interest rates to come down and markets return 10% plus as a result.

The outlook for 2025

Of course, nobody knows which of these three outcomes will prove correct or even how the course of the next 12 months will unfold. It could indeed be some combination of the three views, each of which present itself at a different time over the course of the year.

What we do know is that currently the market is pricing in just two US rate cuts this year (down from seven last year this time, and about four fewer than the market was expecting as recently as September 2024). Economist consensus forecasts of the probability of a US recession have fallen from 65% to 20% over the past 18 months. The strong economy is also reflected in the contraction in credit spreads last year where, despite Treasury yields rising 70bps, high-yield spreads fell 30bps. This is sending a message that investors are comfortable taking on more risk in both the bond and equity markets.

The fact that markets have continued to rise despite the view of fewer rate cuts is a sign that the outlook for the economy is robust.

From a valuation perspective, markets are being priced according to their outlook, in my opinion. European markets are cheaper than US markets; however, they are expected to have a tough year with both German and French political issues weighing heavily on the region’s two biggest economies. The UK also screens cheap; however, its large exposure (at an index level) to banks and resources makes it potentially more volatile to tariff risk and the outlook for China and commodity demand in general. The UK’s new Labour government also has to deal with surging bond yields, which could put the brakes on spending plans and lead to some form of austerity.

Emerging markets like South Africa are also likely to find themselves tied to Chinese news flow. A strong Chinese economy is actually pretty important to both Europe and EM as a whole, and sentiment is likely swayed one way or another by the outcomes of Chinese stimulus versus expectations of the support the government may provide.

The US, of course, trades at a premium – probably because its economy is the most robust at present in a global context. Trump is less of an unknown now than he was in his first term, and the potential for deregulation and tax cuts can boost activity. The US is therefore in a major position of strength coming into 2025 (on a relative basis).

Should the strength of the US economy persist, and interest rates continue to fall, the breadth of the market rally should continue to widen and some of the laggards of 2024 may provide superior returns in 2025, allowing diversified portfolios to flourish. Avoiding Big Tech+ and Mag 7 concentration and remaining diversified has not necessarily yielded the best results over the past two years, but it is arguably still the correct thing to do from a risk perspective.

At the end of the day, our strategy at Λnßro is still the same. We are looking to invest in great companies that fit the profile of Λnßro’s three portfolios – the Λnßro Unicorn Global Equity AMC, Λnßro World’s Biggest BRNDZ AMC and Λnßro Dynamic Compound AMC, all available on Mesh – and their respective investment styles. The long-term outcome should be favourable despite any short-term hiccups that are bound to manifest.