Welcome to your January monthly market outlook from atomos
As we welcome a new year and look forward to what it may hold, we thought it would be a good time to remind you of how we approach investing here at atomos.
When we consider the balance of opportunity and risk in investment decisions, we think about both ‘micro’ and ‘macro’ investment themes. Microeconomics is all about how companies and individuals make decisions in response to what’s happening in the wider world. It could include supply and demand dynamics, production, consumption, and pricing. Macroeconomics is analysis of big-picture economic data such as interest rates, inflation, GDP growth and unemployment numbers.
These themes help us to look for the most important macro forces and help us to understand what is likely to drive outcomes in markets over the next year. Where assets aren’t fully pricing in our expectations, this creates opportunity.
We’ve identified three themes we think will be important for investing in 2025:
Theme 1: The US business cycle
We think the US economy will once again perform well this year. We expect annual real GDP growth to be in the 2.2% to 2.5% range, above the long-term trend for the US. Core inflation is likely to still be around 2.5%, sufficiently close to the Federal Reserve’s 2% target. The US labour market is more balanced, wage growth has slowed from an elevated level but is still robust, and household balance sheets are strong. US business investment is likely to be supported by good consumer spending growth and the artificial intelligence theme which dominated 2024. We expect the Federal Reserve to continue to ease policy gradually in 2025, which should underpin good US economic and corporate earnings conditions. This macro environment is typically good for the performance of assets like equities and corporate credit. We are happy to take some investment risk in the US given this positive outlook but, with some stocks looking expensive, it’s important to be selective. For example, we like US small-cap equities, as well as the more typical larger US companies.
Theme 2: Japan the outlier
Japan is in a hugely different economic place to the other major advanced economies. Macroeconomic conditions are more consistent with inflationary pressures building in a healthy way and a need for the Bank of Japan to gradually tighten monetary policy. This means it has been raising interest rates where other central banks have been cutting. That is quite the change compared to the last couple of decades. At the same time, we see several factors that should support Japanese stock prices this year:
Theme 3: Divergence in key economies
The global inflationary forces that led to an almost universal tightening of monetary policy across advanced economies have unwound. These economies are now growing at vastly different speeds, face different inflationary pressures, and will have different government and industrial policies in 2025. This will continue to lead to different responses by central banks in terms of the pace at which they cut interest rates. This creates potential investment opportunities in government bond and currency markets.
Portfolio strategies for an unusual environment
We think investors face two important conditions today. Firstly, we are in an unusual business or market cycle compared to recent memory. Unusual how? Because central banks – in this case the US Federal Reserve - are cutting interest rates while growth is good. It is even more unusual for a ‘soft landing’ to be achieved - that is, an economic environment in which growth settles around trend and inflation is around the central bank’s target.
Secondly, we think the possibility of major long-term or structural shifts in the economic environment is higher. This could be from artificial intelligence-related innovations affecting economies and companies, escalating conflict between countries, or climate change and its increasing impact.
In this environment, what can we do to improve our chances of portfolio success? Here are two big-picture examples:
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Use multiple approaches to measure risk, such as scenario testing and projections, and reverse stress-testing. These are likely to yield richer and more useful insight than using a single approach in isolation.
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Accept uncertainty. There is no ‘magic bullet’ to removing risks. However, a fixed investment strategy is less likely to produce the best return outcome as it will only work well in some environments. Instead, changing exposure to areas of concern, trading through events, and hedging can capture opportunities, add value, and minimise losses.
Sector in focus: Global real estate
Listed real estate includes publicly-traded companies or trusts that invest in property assets, providing exposure to the real estate market via stock exchanges.
The overall sector has become less predictable in recent years, with wider differences in performance across the different sub-sectors. This is partly due to the challenges faced by retail and office buildings since the pandemic, and partly due to strong performance in industrial, residential and alternative sectors such as self-storage and healthcare properties.
Data centres and tower companies have gained prominence compared to traditional sectors, as real estate adapts to changing demand patterns such as increased connectivity and demographic shifts.
Looking forward, we see opportunities and favourable pricing in sectors like healthcare, supported by an ageing population, and residential, where there is not enough supply in many areas. Office markets face mixed challenges, but potential interest rate declines could improve value, while inflation-linked rents provide stability.
If you would like to discuss any of the topics covered in this month’s outlook, our door is always open. Contact us
Content correct as of publication on 3rd January 2025
All investment views are presented for information only and are not a personal recommendation to buy or sell. Past performance is not a reliable indicator of future returns, investing involves risk and the value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested. Any views expressed are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness by atomos. Any expressions of opinion are subject to change without notice.