“What’s bugging me is that everyone is saying the same thing,” says FT markets columnist Katie Martin, wearied by the slew of 2025 outlook reports published by banks and investment houses in recent weeks.
“And essentially it’s ‘American exceptionalism’,” — broadly, that despite Trump’s policies on international trade, tax and migration being inflationary, arguably even fiscally reckless, and despite US stocks being very highly priced, analysts still think the market is the only show in town when it comes to investment.
“Personally, I find that a little bit worrying,” she says. “Because it opens up the possibility that if something goes wrong with this narrative then everyone runs to the other side of the ship all at the same time.”
In a conference room perched at the top of the FT’s London headquarters, in the shadow of St Paul’s and over a sandwich lunch, the Money section held its annual investment roundtable this week. As usual, there was one item on the agenda: what do retail investors need to look out for next year?
In answering that question, we discussed Trump’s tariffs; bubbly US stocks; the future of UK equities; and whether, in the week after bitcoin topped $100,000, we could say anything sensible about crypto — all presented here with the usual caveat that this should not be considered financial advice.
Joining Martin on the panel were Alix Stewart, a fund manager on Schroders global unconstrained fixed income team; Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International; and FT Money columnists Simon Edelsten, also the chair of the investment committee at Goshawk Asset Management, and Stuart Kirk.
What will Trump 2.0 mean for investors?
Donald Trump’s resounding victory in November has shifted the economic outlook for 2025, with many analysts predicting a relatively benign environment for investors.
According to his own scenario-based framework, Salman Ahmed submits the most likely outcome is that the US will enter a reflationary period in 2025, characterised by higher consumer spending and improved corporate earnings. His research suggests the next most likely outcome — with a 20 per cent probability — is less benign, with migration and tariff policies producing an inflation shock and a period of stagflation.
With regards to trade tariffs, Ahmed believes a 60 per cent import tariff rate for China and a 20 per cent rate for the rest of the world is the likely maximalist position — and in some cases, appear to be partly negotiable, with those applied to China, Canada and Mexico linked to their failure to control drugs or illegal immigration to the US.
“The one we have to be careful about is Europe, because we have not heard anything about it,” says Ahmed. “That is not about the border, it is not about drugs, it is pure economics.”
The history of tariffs between Europe and the US is a long one, says Simon Edelsten, and one that goes both ways. “It is quite easy for us to forget how many tariffs there are for American exports to Europe,” he says — particularly in agriculture, but also cars, steel and other strategic goods.
“That said, as an equity investor, I don’t worry very much about tariffs,” he says. “You hear about a lot, and the number of them that turn up, unless there’s a very good reason, are very few.”
Stuart Kirk thinks investors needn’t worry about tariffs in any case. “Look at the markets,” he says. “Investors don’t care: it feels very, very late 90s out there . . . it has that very optimistic feel about it.”
But how long can it last? Towards the end of 2025, Ahmed predicts that additional tax cuts could expand the US deficit to 8 per cent of GDP — a level of borrowing that bond markets would find unacceptable in other economies. But then, this isn’t any other economy.
“The US has an advantage, which is that it is a deep, liquid market,” says Ahmed. “It can absorb a lot of flows, unlike the UK.” While the leeway afforded will be greater than to other countries, he adds, “where is that limit? That is probably going to be the bond market assessment.”
Yields on 10-year Treasuries were growing reasonably quickly since October, up to just shy of 4.5 per cent; but when Scott Bessent was named as Trump’s pick to lead the Treasury department at the end of November — viewed as a relatively sober choice by the markets — yields started to come down.
While there is some concern that tariffs will cause inflation to rise in the short term, says Alix Stewart, beyond that expectations haven’t changed much. “So far, there hasn’t been anything that’s allowed the bond vigilantes to get particularly worried about,” she says, referring to those large bond traders who try to influence fiscal policy by selling en masse and causing yields to spike. “[But] we are beginning to get the question marks further out about fiscal sustainability. It’s the elephant in the room that’s there all the time.”
Aside from a potential “Liz Truss moment”, another tail risk could be the damage to US institutions. Away from the relatively benign base case consensus of banks and investment houses, Martin says that senior investment officers and portfolio managers have told her that they’re nevertheless concerned about institutional resilience. Take the aforementioned nomination of Bessent, for example:
“He was definitely the best of a series of quite questionable options for that position. And the market’s taken that very well,” she says. “But he’s still the same guy that has been proposing a ‘shadow Fed’. To do what? What could a shadow Fed do other than undermine the actual Fed?”
While Trump is limited in what he can do with regards to changing the chair of the Federal Reserve, or the make-up of the Federal Open Market Committee, which sets US interest rates, there is what Martin calls a “low-level undermining” that could become a problem, especially regarding dollar policy.
“It’s worth taking those tail risks seriously, because the American exceptionalism story on US equities works only if you have the robust institutions that are there to underpin it. “So growth can be great,” she continues, “Nvidia can be Nvidia, and you can have amazing earnings growth in American companies. But if you pull the rug from under that story by mucking about with the Fed, or by doing something zany with dollar policy, then a lot of that can fall apart quite quickly.”
Is the US stock market in a bubble?
“I think the market feels more frothy to me with every time I go on social media,” says Kirk. “Every single risk asset’s got this buzzy excitement about it. Everyone’s really, really bullish.”
He likens it to previous bubbles: “I ran Japanese equity money when everyone was talking about Japanese exceptionalism,” he says. “And this feels very similar; ditto dotcom. And I have to say, it’s not a question of America being exceptional, we know it is for various reasons. It’s how much of that is in the price.”
In nominal terms, Edelsten says he’s never had so much money in his global equity funds in the US than he has today. “And that’s despite the fact that I completely agree that some of the biggest companies in America are ludicrously expensive.” He cites Apple, the biggest company in the world, but one whose share price trades at 37 times earnings for the current year.
The question is, he says, how much of that valuation is based on the fundamentals of the company and the belief in its earning potential, and how much is simply a product of the rapid rise of passive investing, which drives up a small number of big shares? “That’s when you can get bubbles,” he concludes.
There’s another issue that retail investors need to keep in mind, says Kirk, and that’s the difference between absolute and relative returns. For fund managers, relative performance is key — being underweight in a booming market could lose you your job. “[But] for the average mum and dad, you could still make money, in an absolute sense, in Europe next year — even if it underperforms everything else,” he says. “Being underweight in [government bonds] or Europe doesn’t mean your retirement pot is not going to go up.”
The difficulty is, in the 18 months to two years before the market peaks, it can have incredible growth. “If you’re out for that last little section of it, it can really hurt.”
Where are the opportunities in the UK?
A gloomy outlook has pervaded the London Stock Exchange for some time, with the valuation gap between the UK and US markets at a record high and a string of high-profile delistings.
Nevertheless, for Kirk, the investment case is clear: there are good-value companies, it’s international and “it’s properly Anglo Saxon”, in that management cares about shareholders. What’s more, he says, if you look at return on invested capital, and exclude the top 10 or 20 companies that everyone’s heard of, “there are some spectacularly high-returning, mid- and small-cap companies in the UK — really sexy and cheap”.
In terms of opportunities, Edelsten suggests that UK banks should have a decent period, so too Experian, the credit checking agency, and RELX, a big beneficiary of AI: “It’s the world leader in providing lawyers with ways of writing legal opinions using computers and then charging a lot for them — so it’s absolutely in a perfect position.”
Whether the Labour Budget will boost UK growth in the new year is up for debate, though. “I’m afraid I have to say, I think the City — including a lot of Labour-voting people in the City — were pretty depressed by the Budget,” says Edelsten. “Many are rather hoping that Rachel Reeves would come back and say: ‘Actually, we’ve got some new stuff.’ I’m not sure they’ve been radical enough, almost, because we would like to see some growth.”
Ahmed sees an opportunity in a reset in the relationship between the EU and the UK. “Obviously, they are not going to go back into the EU, but politics is the art of the possible, right? All you have to do is not say ‘Brexit’ and say something else.”
Martin thinks there is a good chance the UK will see a rash of IPOs next year, with the most high profile among them being the Chinese fast-fashion giant, Shein. “And I think for the UK, what’s particularly relevant is that the first one, two, three of these things [IPOs] have got to go well, because, yes, there’s a lot of sophisticated analysis that goes into IPOs, but 80 per cent of it is vibes . . . And if you manage to puncture the vibes with a couple of bad deals from the off, then we’re in trouble.”
What are we missing in our analysis of Europe and China?
“My stance for next year is that actually, although Europe’s quite cheap- looking, the really big gains will come if China gets better,” says Edelsten.
China certainly has challenges, quite aside from the Trump tariff. There are demographic issues: it has a rapidly ageing population and no longer a rapidly growing workforce. There has also been the huge debt deflation caused by the oversupply of properties. But in September its stock market rallied on the back of a stimulus package and on Monday, Beijing pledged to increase measures to spur growth next year.
Edelsten says that if savers were nervous about investing in Chinese companies directly they could look at Hong Kong stocks, which abide by London Stock Exchange standards. “But you can just buy a lot of European companies, which have been very bad performers because their China business has been poor.” He points to LVMH, the downturn in the luxury sector, weighed down by China’s economic slowdown.
Meanwhile, the Dax is at a record high, says Martin. Rheinmetall, a relatively small European defence company, is up 107 per cent in the year to date — “And why would you not be long European defence right now?” she says.
“My pet theory is that the market is massively underpricing the chance of something good happening in Ukraine,” Martin adds. “Putin’s foreign adventures are falling apart at pace. Trump wants a deal . . . and while no reasonable people want it to just have peace at any cost, the market is assigning basically zero possibility to the chance that something good might happen at some point in 2025. And I think that’s a bit silly.”
One difference that several around the table picked up on between US and Europe is that where Trump wants to cut taxes, Europe is heading towards fiscal austerity.
“If we’re asking ourselves what Europe might be able to do to make itself investible again, in the short term at least, then [it could be] loosening the fiscal reins a little bit,” says Stewart. “Because it’s certainly not anything that the bond markets are worried about. They’re much more worried about the fact that the recession signs are still looming quite large.”
Can we say anything sensible about crypto?
“Number go up,” says Martin, with a shrug.
“I didn’t expect the number to go up as much as it had, but it has,” she continues. “It still has no core utility to it. It still doesn’t give you a claim on anything useful. But I think those of us who have doubted this thing for the past 15 years have got to accept that there are more buyers than sellers.”
This time next year, she says, going by total guesswork (because there’s nothing else to go on when determining the price) it could be anywhere from $80,000 to $500,000. “And if the Trump administration goes through with this plan that some are touting for a strategic national reserve of bitcoin, God help us, then there is no upper limit to this thing.”
Edelsten says: “I think one very important thing about the history of bubbles is that they go up in anything from a 45° angle to a 60° angle to an 80° angle. They go down in a 99° angle. And they rely, fatally, on people believing that they’ll get out.”
“If you want to play in that space, go for it,” says Martin. “But just make sure you are able to withstand losing all of that money overnight.”
https://www.ft.com/content/ccb13a16-9820-4fc8-9bca-479e44e91909
