For those of us working in the world of financial markets, the time has come to speculate about what we might expect in the year ahead. Looking to 2025, one thing seems clear: Trump will dominate the headlines. His pledge to slap tariffs on half the planet is set to keep everyone on their toes, although it is likely a tactic to secure concessions. Surely someone has told him that protectionism is bad for everyone. North Korea would be the richest nation on earth otherwise. The US economy will remain solid, and Trump will also bring in deregulation and lower taxes (though not to the extent he claims, as the numbers simply don’t add up). Meanwhile, the European economy will likely continue to stagnate, weighed down by a number of chronic issues that remain stubbornly unresolved. The ECB will need to cut rates further, potentially pushing them back below 2%, while the Fed will have little room left for reductions, and it may even need to reverse course and raise them. The winner in all this? The dollar. If you’re planning a trip to see the Statue of Liberty, you might want to book your flights now.
In the geopolitical sphere, Trump has also promised to bring an end to the war in Ukraine in short order. This seems plausible, particularly as the conflict is entering its third year and is taking a toll on both sides. Europe is facing elections in Germany and a political stalemate in France, likely to persist until fresh elections in the summer. Should these uncertainties be resolved, European assets could turn out to be a surprise performer next year. For the time being, however, investors are steering clear of Europe. The same can be said of investor sentiment on China, which continues to grapple with excess household savings and the slow yet steady implosion of its property sector. The unanimous consensus? The US stock market will likely remain the top performer in 2025. As if this were not enough, the US is also leading the artificial intelligence revolution. However, unanimity often signals opportunities elsewhere.
FC Barcelona will finish fifth in La Liga but reach the final of the revamped Champions League, earning them a spot in the next edition. The other finalist will be Atlético Madrid. Andorra FC will be promoted to the second division once again. Djokovic will win another two Grand Slams. The highest-grossing film of 2025 will be “Formula 1”, starring Brad Pitt (Avatar 3 will flop). As for Santa Claus? Climate change will force him to relocate from the North Pole to Ordino. All of the above (well, nearly all of it) is possible, but it quickly becomes clear that the events of the last paragraph are far from certain.In other words, we easily distinguish “possible” from “probable” when we are talking about football, yet we struggle to do so when listening to so-called “experts” in financial markets. Here is a good time to mention that the major investment banks routinely predict where markets will be in a year’s time, and decades of data show that they miss the mark by an average of… 15%! If they get it right, it’s down to luck (I never give precise numbers myself, just in case someone remembers). The good news is that they tend to underestimate market performance (stocks often rise more than expected).
Why, then, are we so drawn to forecasts and predictions, knowing they are of no use? The answer lies in human nature: uncertainty makes us anxious. It’s a defence mechanism that has enabled our survival as a species. Throughout history, we have sought answers from gods, oracles, tarot cards, and even animal entrails. In reality, however, predictions are not necessary when it comes to investing. What truly matters is dedicating time to understanding the current environment and learning from history. Humans are creatures of habit: what happens today often resembles past events, from which valuable lessons can be drawn. If we also commit to paying a fair price (because even the best idea, if overpriced, is a poor investment), we will be able to build a portfolio with a high probability of strong returns. By capitalising on volatility (i.e., temporary market swings caused by specific events), we can further improve the odds (and the returns). There is just one magic ingredient needed: Time. Given enough time, a sound portfolio almost certainly offers good returns. Be wary of inflation, which eats away at our savings, but not the financial markets. And as for predictions? Ignore them – they’re simply not needed.
Date of report: January 8th 2025