SustainAbility: Navigating crosscurrents

The start of a new year is always a busy time for forecasters. It is an opportunity to speculate about what the coming 12 months will bring.

As always though, most forecasters will be wrong. It isn’t that they are not intelligent, competent people who read vast amounts of information. It is more that financial markets are like the weather: complex, dynamic and non-linear systems subject to change depending on events. They are complicated, too complicated, to predict accurately.

No one has privileged access to the future and keeping an open and flexible mind as it unfolds is a key, and difficult, skill in investing. This year, like most others, there are many crosscurrents, the interactions between which are largely unforecastable but hugely important for the eventual outcome for investors. Here are a few:

• Artificial intelligence continues to develop at a pace that is hard to comprehend. This is a function of huge increases in the amount of computing power and the growing sophistication of AI models (known as Large Language Models – LLMs) in using it. The use cases for these will grow exponentially in the coming year and much like the internet in 1999 we are likely underestimating the investment and societal consequences of this. To some extent it explains the strong investment performance of many of the largest technology companies in 2024, who are developing these new technologies. How AI develops in 2025 will a have a large bearing on markets.
• Geopolitics will continue to dominate the headlines after Trump is confirmed as the 47th president of the United States on January 20. He has promised to end the war in Ukraine in a day, and slap huge tariffs on China, which he blames for the deindustrialisation of the US. The lesson from his first presidency is that chaos could likely ensue. While it has been wrong to base investment decisions around geopolitics in recent years – the lack of impact on markets of the tragic Ukraine war being one example – this will be tested in 2025. Trump will try to do deals to resolve geopolitical issues, but no one knows if he will succeed or make them worse. The Chinese approach to Taiwan remains a tail risk for markets and were an attempt made to claim the island, via invasion or blockade, this would have major consequences for investors.
• Obesity drugs may well change the future potential of many industries. As well as reducing many co-morbidities related to obesity, these drugs are being trialled for other diseases such as Alzheimer’s. Whilst there can be no certainty they will work, the increasing availability of these medicines, as their cost rapidly decreases, could see major health benefits for large populations of people. Rising healthcare costs could be stopped and industries such as food and drink may be disrupted as consumption habits change.

One thing which is clear from 2024 is that markets are quite poor at forecasting the future path of interest rates.

• Interest rate expectations seem to be increasing again. The US Federal Reserve did its best to steal Christmas when, despite cutting interest rates by 0.25%, it suggested that further reductions were unlikely as economic growth remains strong and inflation sticky. Since the first cut in US interest rates, bond yields and long-term interest rates have gone up, perplexing many who expected them to fall. In the US, mortgage rates are now back at levels they were in 2022 when recession concerns were at their peak. There is no doubt that higher long-term interest rates (remember, the Fed only controls overnight interest rates, the markets set the price for the rest) in the real economy will act as a brake on economic activity. Will they cause a recession? It seems unlikely to us, but one thing which is clear from 2024 is that markets are quite poor at forecasting the future path of interest rates.

In my view, these four crosscurrents will be important in determining how investors fare in 2025. It is not an exhaustive list either. There are many more things which could go right or wrong, and events we cannot comprehend which may occur. This is the nature of markets. It has always been so, and always will. It isn’t an impediment to being a successful investor however, it just means we must focus on more certain things.

The inevitable

As the saying goes, the only inevitable things in life are death and taxes. Humorous as this is there are many other factors that are certain that can provide a solid basis for investing. Here are a few:

• Optimists make more money than pessimists in investing and there is a good reason for this. Over time, society typically becomes more prosperous, and corporates and consumers benefit from it. I can see this over the course of my own life where generation by generation living standards and opportunities have increased for the majority. Economies grow due to the ingenuity of those within them and I think it is a certainty that global GDP (a measure of all goods and services produced) will be meaningfully higher a decade from now. This is a great backdrop for equity investors.
• Innovation will continue to boom. AI will transform society in a similar way to the PC, iPhone and the internet. Slow at first, but then ultimately pervasive and we have barely begun that process. Fully autonomous mass market vehicles, already on the streets of many US cities, will be rolled out globally. New medicines will be developed for major disease categories such as cancer and Alzheimer’s. This innovation typically creates new markets for those companies who deliver it, providing investors with opportunities to benefit too, as we have seen with large technology companies today. Innovation also provides a great backdrop for equity investors.
• Essential services will remain essential. There are many services and products we use today with a high degree of certainty they will be used in the future. These include banking, water, energy, food and telecommunications. The stability these areas provide is appealing to fixed income investors, but they can provide diversification for equity investors too.

There are of course other certainties out there, but economic growth, innovation and essential services are three of the most powerful ones. They may not lead to portfolios that are immune to the near-term impact of the crosscurrents noted above, indeed some benefit from them. But they do offer a path to potential long-term investment success.

Last year, 2024, had its challenges and uncertainties but was ultimately a positive one for most investors. No one knows what 2025 will bring, but I think being an optimistic and patient investor will be the right mentality for success.

This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.