Axis Tactics 12th December, 2024 - A preliminary outlook for 2025

A Preliminary Investment Commentary for 2025

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In advance of our full 2025 outlook, we set out a few pertinent observations below, with more detail to follow in the coming few days.

Global Equities and Asset Allocation

If one invests with the principles of prudence and discipline at the core, then some form of diversification across an invested portfolio is highly desirable.

With this in mind, we seek out alternatives to the very expensive US sectors that have driven returns to date. The risk of a correction is very much present, given the elevated valuations of some Tech names. That being said, following the trend (until it ends) is paying off so far and since it is currently inexpensive to hedge using equity options or VIX Index Futures and Options, the risk profile of running with the trend until it breaks can be mitigated quite economically.

We could quite easily see a 6500-7500 range next year for the S&P 500, especially if the US 10 Year Yield also has a 75bp or 100bp range during the year. Tech supremacy aside, if the Indices are locked in a range, the US is likely to be a special situation and stock selection marketplace next year, within infrastructure and select sectors that benefit from the new Trump administration.

At investment level, with the S&P 500 and Nasdaq 100 at all-time highs, the outlook appears rosy. However, under the bonnet, there are still structural issues in the US which could derail the party. Individual debt is still a serious concern, with Home Ownership funding at around 7% and Car Finance well into double figures. Tariffs and the ensuing knock to US GDP and inflation bump could certainly cause a little mayhem by pushing the cost of living over the threshold, for many US households.

Elsewhere, we find value in Brazil & China and a simple ETF such as EEM will service this allocation nicely. Gradual accumulation across both, given the volatility journey that both markets are expected to follow.

Across Europe, we think that France is best avoided, with Germany preferred due to it’s superior US exposure. Broadly, though, as the Stoxx 600 is trading on almost a 10% discount to it’s average P/E (10 years) and also at it’s widest discount to the S&P 500, we drilled down into this Index to find value - and we landed on Healthcare and Pharmaceuticals, both of which have been discounted heavily on several fundamental valuation criteria, relative to their Sector Peers.

In the UK, the FTSE 100, at a P/E of just under 12, has the feeling of a value trap. Cheap - but cheap for a reason with a slow BOE and messy Budget aftermath. Almost a third of FTSE 100 Index constituents are trading at least 1 SD below their 10 Year P/E average.

For these reasons, Index investing in the UK isn’t our preference, instead seeking to mine for specific situations and names that offer both upside potential and a valuation margin of safety.

FX/Commodities

Tactical calls so far:

Short EUR/USD

Long GBP/CHF

Short EUR/GBP

Short WTI

Cash >10% (opportunistic allocation) as volatility expected to be higher in Q1 (2025) and Q2 (2025) than Q3 & Q4 (2024)

Typically, precise and timely recommendations for trading positions and investments across asset classes will be in the section below. Please reach out to your usual contact for access.