Hugh Gimber (pictured), global market strategist at JP Morgan Asset Management
As we stand at the cusp of 2025, the world remains abuzz with the potential ripple effects of Donald Trump's re-election which is likely to have far-reaching consequences beyond the US.
And while it is only human nature for noteworthy political headlines to consume our immediate attention, we urge investors to resist this temptation.
From a macro perspective, we anticipate a continuation of the global economic expansion over the coming 12-18 months, albeit with inflationary pressures remaining somewhat persistent.
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However, the uncertainty surrounding US domestic and foreign policy, coupled with the international response, adds a layer of complexity to the investment landscape.
In times like these, it is easy to become absorbed by politics, but often much bigger market forces are the primary drivers of relative performance.
With that in mind, we believe there are four key themes investors should look to reflect in portfolios as we head into the New Year.
AI investing: more broadening than bubble
As 2025 nears, the composition of the S&P 500 underscores the significance of artificial intelligence-linked companies, with the Magnificent Seven continuing to dominate market cap, earnings and returns.
This has led to extended valuations, with the largest stocks trading at a significant premium.
However, this valuation gap cannot last forever; if the broader AI ecosystem generates substantial revenues, other companies should see earnings catch up.
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If not, justifying the mega caps' valuations will become increasingly tough.
The strong fundamentals of the mega-cap companies, both relative to other parts of the market, as well as relative to the 2000s tech bubble, suggest that a major 'catch down' is unlikely.
However, these companies are increasingly being asked to demonstrate a return on their investment, with concerns about the gap between hardware revenue expectations and actual growth.
The question is a simple one: "Show me the money?"
Going forward, the best AI-related opportunities are likely to be found further out along the AI value chain, rather than in the recent winners.
Cheaper valuations and lower earnings expectations outside of mega-cap tech suggest that even AI bulls should be positioned for further sector broadening across 2025.
Challenging the discount on European stocks
At face value, the policy approach from the incoming Republican administration is likely to widen the gap between the US economy and the rest of the world.
Yet despite this 'America first' agenda, there are still strong reasons to diversify equity allocations regionally.
While the S&P 500's earnings are expected to grow significantly, European earnings forecasts are far more modest, lowering the bar for results to exceed expectations.
The discount on European benchmarks relative to the US is partly due to sector composition, with fewer tech stocks compared to the US.
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European indices are more weighted towards industrials and commodities, which have faced challenges from global demand and a weaker Chinese economy.
However, all European sectors currently trade at a discount to their US counterparts, reflecting general investor pessimism.
Within the basket of European stocks, we prefer UK equities.
It is well known that UK companies pay a healthy dividend, but buybacks have now also picked up, suggesting that UK chief financial officers view their shares as too cheap.
What is more, improving merger and acquisition activity should also provide support for valuations.
Chinese stimulus and the prospects for emerging markets
China's recent monetary easing and fiscal support have lifted stock valuations, but further policy interventions are needed to ensure sustainable corporate earnings amid potential trade tensions.
Investors should actively manage their emerging market allocations to capitalise on shifting trade patterns and domestic policy nuances.
China's real estate crisis has seen residential property prices drop by 12% since their Q2 2021 peak, with excess supply and demographic shifts contributing to the downturn.
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With two-thirds of household assets tied to real estate, this weak market dampens consumer spending.
Without further government intervention, China risks a prolonged 'balance sheet recession' similar to Japan's.
Recent policy measures have reduced financing costs and supported property demand, but more comprehensive solutions are needed.
Urbanisation and reforming the Hukou system could help balance the housing market.
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Looking to 2025, further Chinese stimulus may offer somewhat of a boost to broader emerging market stocks, but its impact will be less significant in comparison to past infrastructure-focused measures.
Instead, investors should focus on countries that are benefiting from friend-shoring and global trade reshuffling, like Mexico and Vietnam.
Northeast Asian stocks also appear well positioned to benefit from the global tech cycle, and are far more reasonably valued than US tech counterparts.
Successful emerging market investors next year will need to actively navigate these regional disparities.
Re-thinking portfolio diversification in 2025
With inflation pressures lingering, and spiralling levels of government debt, many investors are questioning whether bonds will still provide a life raft in times of market turbulence.
Today's investing landscape demands a reimagined approach to diversification — one that incorporates bonds for income and protection against a shock to growth, but also considers inflation-sensitive assets, such as infrastructure and transport in the alternatives world.
While we remain constructive on fixed income, a broader diversification strategy for multiple types of shock allows investors to build more resilient portfolios, better-equipped to navigate the complexities and uncertainties of today's global economy.
Hugh Gimber is a global market strategist at JP Morgan Asset Management
