As the end of 2024 approaches, the editorial team here has as usual received predictions from wealth managers about what the next 12 months might hold and what they are minded to do in terms of asset allocation. What points do these predictions share?

There is a need to trim exposures to US Big Techs and diversify to other parts of the world’s largest equity market in 2025, and also be mindful that global interest rates may decline only slightly further amidst signs that inflation is sticky.

That seems to be the main take-home point from poring through the mass of predictions and asset allocation commentaries that have come in during the past few weeks ahead of the holiday break. 

The US continues to set the investment pace, and its stock market. Valuations are relatively high but are mostly (key caveat) justified by the “fundamentals”.

As far as the S&P Index of US equities is concerned, there has been some easing in valuations of stocks already. The price-earnings ratio, on a forward basis, is 24.14 times earnings, down from 25.2 in the previous quarter and down from almost 29 a year ago, or down 16.5 per cent on a year before. Three years ago, it was about 18.6.

The “Magnificent Seven” Big Techs have wowed us with their performance in recent months: (Alphabet (the parent company of Google), Amazon, Apple, Meta (owner of Facebook, WhatsApp and Instagram), Microsoft, Nvidia and Tesla. And a general sense one gets is that they can run a while yet before there’s a significant bump in the road. But even so, a number of banks and asset managers talk about broadening out where they invest.

HSBC Global Private Banking and BNP Paribas, to give two examples, take this view. (See here for HSBC). Another that expects the US equity opportunity set to broaden in 2025 is UK-headquartered abrdn; Standard Chartered likes US equities, expecting a new Donald Trump administration will turbo-boost the US economy. Northern Trust Asset Management, UBS Global Wealth Management, Pictet Asset Management and Goldman Sachs Asset Management, also favour US equities in 2025. 

Questioning the positive note on US equities in 2025 is Edmond de Rothschild Asset Management, which says it expects to start cutting US exposures in coming months; it also notes that bond markets provide very limited support for risk assets in 2025

It is hard to find signs of great dissent from the case for diversification away from Big Techs. That said, the editorial team hasn’t come across any examples of significant retreat from the Big Techs, although one or two managers have talked about cutting positions to take profits, such as in chipmaker Nvidia, for example. The early-August slide in US stocks, triggered by worries on earnings, appeared to do the trick of rebalancing portfolios almost automatically away from the Big Techs.

A tough nut to crack
One theme that seems quite widely shared in recent weeks has been awareness that inflation, which has fallen pretty much everywhere over the past 12 months as higher interest rates did their work, is more sticky than some may have supposed. Last week, for example, US Federal Reserve Chairman Jerome Powell suggested that room for further rate cuts in 2025 was limited. Stock markets tumbled in the middle of last week. And that means that the likelihood of a big drop in the risk-free rate – as expressed by yields on US Treasury bonds – aren’t going to fall as much as some might have thought. 

The following comment from Kate Morrisey, head of asset allocation at Evelyn Partners, the UK wealth manager, summed up the thinking of many: “While 2024 has been a year of stabilisation, with inflation and interest rates finally easing and economic growth proving to be more resilient than expected – factors that helped to deliver a stellar return for those investing in US equities – headwinds remain. Inflation risks are back on the agenda and government debt levels, along with simmering geopolitical tensions, are still a cause for concern.

We noticed that for several wealth managers, the prospects of higher US tariffs on China, Europe and certain other nations in 2025 – a plank of Trump’s campaign – could add to inflationary pressures, as could a big crackdown on illegal immigrants if that squeezed the US labour market. 

Private markets
As readers know, private markets (credit, equity, property and infrastructure) have boomed over the past 20 years, coinciding with a shift from listed to private markets, and accelerated by the long period of ultra-low interest rates and a hunger for yields from less liquid assets. At Suntera Fund Services, that firm says private credit, particularly direct lending, can potentially earn higher risk-adjusted returns versus other asset classes. In private equity, meanwhile, the jolting impact of a sharp rise in rates since the pandemic’s end has partly waned, and some energy has returned to PE and venture capital. The secular shift from listed markets means that, even if valuations get stretched, there is an underlying demand for the sector. 

There appears to be also some consensus that corporate bonds, such as those issued in dollars and by cash-rich US companies, have potential to fare well and even beat US government bonds given worries about the government deficit. The picture appears rather more complex when attention turns to the eurozone, Asia and emerging market fields, where the risks and rewards are more specifically linked to specific countries. There appears some wariness about eurozone government bonds, for example, especially those of France given recent political angst and worries about high debt. 

The fall of interest rates in the past 12 months has led to several banks and firms, such as HSBC, urging clients not to carry excess cash.

Finally, while many firms appear not to mention it much, among those that do, gold remains an asset to be held as portfolio ballast. Apricus Finance, a Geneva-based external asset manager, said in a note this month that gold has been the best relative contributor to multi-asset portfolios this year.