Lessons for 2025 after a year of uncertainty

Some answers have emerged in 2024. For instance, the UK now has a Labour government, while the United States has seen Donald Trump return for a second term. Could these developments signal greater clarity and confidence for risk-takers moving forward?

To explore this, I interviewed three of our team: Tim Drayson, Head of Economics, Chris Jeffery, Head of Macro, and John Roe, Head of Multi-Asset Funds. Each shared their valuable insights and lessons from 2024, as well as what we can carry forward into 2025. Below is a summary of the key takeaways from each conversation.

Reflecting on a year shaped by uncertainty due to global conflicts and pivotal elections, what key lessons or insights can be drawn from the events of 2024?

Tim:
A key economic insight from 2024 is that small upward revisions to growth can amplify corporate earnings and in turn equity performance. Also errors in polling data illustrate the broader problem of data quality. Investment decisions based on over confidence in the accuracy of data are fraught with danger.

One example from 2024 was the massive underestimation of US immigration. Strong inflows helped support consumer spending and a rebalancing of the overheated US labour market by filling excess vacancies.

Chris:
Well I would start by acknowledging the recession that consensus had been forecasting has not materialised and is no longer expected. Similarly at the start of 2024, the Fed was expected to begin cutting interest rates in March, but the first cut did not arrive till September.

At the time these were widely held views throughout the entire market including clients and financial media. This shows it is important to have a sceptical attitude in such situations to avoid reinforcing such views within an echo chamber.

It is critical to retain the perspective that we manage globally diversified multi-asset portfolios. They are not immune to those kinds of shocks that were seen in 2024 but they should be pretty insulated from any individual one of them. Another point to focus upon is that as the facts change, it is important to be able to revisit views that are held to identify if changes to investment decisions need to be made.

John:
While the returns of various asset classes in 2024 were not as expected, it is important to remember that outcomes are often within a wide range, so even if the reality is different from the initial expectations, that doesn’t necessarily mean that your initial analysis and thoughts were incorrect. One must be careful not to draw incorrect conclusions from previous outcomes and carry those forward into future periods.

Such an example would be that it was widely expected that equity returns would be constrained in 2024, but in actual fact, especially in the US, returns were strong. Also, government bonds were expected to perform well, but actually returned less than cash in a number of cases. This illustrates that it is important to understand that things change and therefore expectations should be modified also, rather than just sticking to consensus opinion.

In the wake of a year marked by uncertainty, does 2025 promise greater clarity? Can the lessons that we learned in 2024 serve as guiding principles for the year ahead?

Tim: 
We continue to prepare for different scenarios and adjust their probabilities as events unfold. An obvious example is that whilst there is now the clarity of the outcome of both the UK and US elections, there remains significant policy uncertainty around US fiscal policy and the likely economic impact of tariffs.

Chris:
After the post-pandemic rapid rise in US interest rates, there was a very widely held, almost single-minded, expectation of that the US would eventually succumb to a downturn which turned out to be incorrect. In contrast for 2025, there is currently a variation of opinion as to the impact of US policy. For example, how will potential tax credits and tariffs effect US equity returns?

While US policy is unpredictable, it is important to note that we do have a template of the previous Trump administrations, so some forecasts can be made. Also, for the first time since the pandemic, we have the main economic indicators of growth, inflation and unemployment closer to normal levels.

John:
While we can’t promise greater clarity, volatility measures are at lower levels than has been the case in recent years.The US economy is in a stronger starting position for 2025 than it was 12 months ago, also pro-business policies such as tax cuts are likely to have a positive impact upon the market.

Just a year ago, there were widely held concerns regarding a potential US recession and the impact of inflation. The position has changed dramatically and for most people these concerns are now in the ‘rear view mirror’.

Finally have there been any specific lessons learned from 2024 that will impact your role within the investment process?

Tim:
Every year one becomes slightly more humble due to unexpected economic issues impacting previous forecasts. For 2025, the key question is whether previous economic theories will hold true following the structural shifts that have been seen in the last few years post pandemic. This in turn will then also impact thoughts concerning future asset class performance.

Chris:
While it is understood that many incorrect forecasts will be made throughout the year, the key point is to endeavour to make more right than wrong forecasts. In actual fact a ‘hit rate’ close to 60% would be considered very positive indeed.In addition to making correct forecasts, a key lesson learned is the importance of conviction in how the forecasts are implemented. For strongly held convictions, it is vital to be brave in order that the funds we manage, and in turn our clients, benefit from our correct forecasts.

John:
A key point to focus upon is the co-behaviour of assets, which is critical for diversification and the management of multi-asset funds.Once again, the story for 2024 was the outperformance of US equities of both expectations and other global markets. This has now been the case for a number of years in the last decade, which has led some commentators to believe that this will continue forever and that the US equities are the only ‘game in town’. 

We believe this not to be the case and continue to focus upon the importance of diversification[1] both in terms of asset classes and geography.

 
[1] It should be noted that diversification is no guarantee against loss in a falling market