Every year is interesting, but this one has been especially so.
Lots of geopolitics, the re-election of Donald Trump, the parabolic rise of Nvidia, the reinforcement of American exceptionalism, and the fracturing of the EU over migration and monetary policy. Oh, and the first few months of a pretty unimpressive Labour administration in the UK.
Despite all the noise, it has also been a good one for most equity investors, especially in the US, UK and Germany, with some useful volatility in the emerging markets creating trading opportunities.
Gold, my main recommendation this year, has been pretty good, but has been eclipsed by crypto, and especially Bitcoin, selling now for over US$100k.
It’s been a year riven with contradictions; equity markets have been going up in the US despite slowing monetary growth, diabolical rises in government debt and deficits, and very stretched valuations.
Gold has gone up despite rising interest rates and slowing inflation, and as above the German equity market has risen by 20% despite a sharply deteriorating economic outlook and the distinct possibility that a chunk of its key auto industry will go bust in the face of Chinese competition. And, of course, an absence of political leadership in the wake of the collapse of the hapless Scholz administration.
China has been wallowing around with a moribund property market, somewhat incoherent economic direction and rising youth unemployment.
The list goes on and on, and anyone who reads the papers and commentariat would know that these times we live in ain’t easy.
For years, I have believed that a diversified approach to investment is the only way forward, but one that is focussed on only a few themes, sometimes overlapping and sometimes quite distinct.
It is really easy to get caught up in a single theme, such as the internet at the turn of the century, or AI now, and get your head handed to you when the bubble bursts.
So you need several strands to your investment bow to at least preserve and modestly enhance capital.
I am going to share my thoughts on where some of those strands might be going into what is an uncertain 2025. These are in no particular order, but take note of only the broadest trends.
Let’s start with China.
It’s a country that in the future will likely mean more to the world than any other, possibly excepting India, and it will in the next fifty years most probably overtake the United States.
But note, in fifty, rather than ten years, which was the most recent assumption. China is in a bit of a pickle today, and is suffering outright deflation, possibly of a Japanese type. Bond yields, unlike elsewhere, are plummeting and economic growth, generally overestimated, is now lacklustre at best, and possibly negative.
China has hugely misallocated capital in the past decade, and many if not most companies, barely make a return on invested money. There are supposedly 70 m unoccupied flats in China and vast overcapacity in many industries.
In my opinion, China will have to devalue the RMB and put in place an enormous stimulus programme. That will happen in 2025 and if it doesn’t, the distraction of an invasion of Taiwan becomes ever more certain.
If investors fancy a gamble, Chinese equities at less than 10 cyclically adjusted PE ratios, are a buy for a 15-20% quick uplift. The downside is that if China embarks on a war, the value of those equities outside China will likely be zero, a la Russie, so weigh up the risks carefully before you jump in. Equities to buy include the big China ETFs, Tencent, Alibaba and BYD.
The US is by almost every measure far too overvalued and stands at the top of a precipice. The US equity market represents nearly 70% of global market capitalisation, compared to about 4% of world population. Yes, we all know that the country is the home of innovation, entrepreneurship and apple pie. But it is an unequal society, with lowish life expectancy and a gargantuan and inefficient health care system.
The market is highly concentrated in terms of share ownership and could be the big faller of 2025. I have been premature on this call, but a stopped clock is right at least twice a year, and next year could be it.
The Trump reforms are in some ways commendable, but things like reducing immigration, imposing tariffs and drilling unashamedly for oil and gas are in the short term likely to be negative for growth for a whole slew of reasons. Tariffs will push up prices for US consumers and incline the Fed to slow the rate of interest rate declines, or even to stop it. Bonds have been acting badly, which is a sign that the US, massively indebted at the federal and state level will face increasingly high interest bills at a time when the inflow of foreign money, which has been massive, may well slow. 40% of the US equity market and 30% of the bond market is owned by foreigners.
I believe that this next year Japanese savers, who have massive amounts of money in the US, will start repatriating. This could prompt a fall in the overvalued dollar, and lead to a remarkably quick undoing of the US equity market from its frankly giddy and unjustified heights.
Tight money, escalating debts, rising inflation, and possibly, foreign tumult due to China will make matters very difficult for the incoming administration.
Get out of the broad US market now- and sell US and indeed most other, bonds now.
And convert US dollars into yen and pounds – and more gold.
The yen is crazily undervalued, and one short burst of anxiety by Japanese savers over excessive foreign currency holdings will tip it into an upward trajectory.
The Japanese market, particularly in smaller stocks, could be a beneficiary of this, but it has to be recognised that any major US bear market is bound to somewhat affect other equity markets.
This will include the UK, on which I am bullish, despite the best attempts of the Labour government to dampen growth and enthusiasm.
The fact that so many companies are redomiciling their listings to the US, or buying back their own shares, or being bought out, is because the UK is very cheap.
The UK is also a service economy and is not as severely affected by the dreadful malaise affecting France and Germany. Those two are a real concern; Germany needs to find a new way, and quick, and France is caught in a trap of its own making which is hard to see a way out of. It has a huge state, political dysfunction, a declining Chinese luxury market, and a vocal population which is agitating hard. I think France will have a really bad year in 2025, and it is possible Macron will have to go, No one’s loss of course, but will lead to great turmoil. 6-7% structural budget deficits are unsustainable. France is like Argentina before Milei.
The unravelling of old Europe has been remarkably fast, and it shouldn’t be assumed by anyone that either the EU or the euro will remain as is for long. It’s a very serious situation – either the EU has to become fully federal, which is unlikely, or it dismantles some of its unifying principles.
I won’t cover the emerging markets in this letter, but India is always interesting and despite relatively high valuations must surely feature in every portfolio.
Commodities, apart from the precious metals which are a raging buy, are a mixed bag. China is in quasi-recession, but India could be a new big buyer as it builds infrastructure .
I like lithium again, as it’s so beaten up and China is genuinely moving rapidly to a fully EV car fleet.
Christmas beckons, and I hope all readers of Master Investor will have a splendid one. Next year in March we have a wonderful Master Investor Show planned. Its going to be spectacular, so please make a note for your diaries and sign up (free for you guys, as my Xmas gift) right now.
But you might consider these things for your stockings:
- Japanese yen
- Gold
- Silver.
- UK stocks, including Phoenix Group, M and G, Prudential, Mc Bride, Shell, BP, Law Debenture Trust, IWG, Pets at Home, Sabre Insurance Company, Bradda Head, Manx Financial Group, Astra Zeneca, British Land , IAG and Entain .
- Japanese funds, notably Nippon Active Value Fund.
- In the US, Royalty Pharma Group and Arrowhead Pharmaceuticals.
- Short bonds everywhere except China.
- UK pound against Euro
- Short NVIDIA – for the very brave!
Happy hunting
Jim Mellon
December 15th 2024