- How To Invest in a Fully-Valued Market
Investors rarely agree on any one point; after all, there is a buyer and a seller at every price. But as we enter 2025 most investors do agree on one thing: Market valuations seem to be full and not many think assets are cheap. This is true across both fixed income and equities, the most widely-traded asset classes. The question we then ask about 2025 is: How do you invest in a fully-valued market? The simple answer is to optimize asset and investment selection in portfolios, because their return attributions may make a bigger difference than has been the case over the last several years. Said differently, we must prioritize alpha over beta. - The Bull Market Matures on Optimism
On September 30, 2022 the S&P 500 hit a -25% bear market correction from earlier in the year. But historically, -25% corrections have generated excellent buying opportunities. As it turned out, the 12-month return for the S&P at the end of September 2023 was +20% and 2024 has been equally consistent as the second year of this bull market. We are now entering what we believe is the "optimism phase" of the bull market, where we expect investors to be even more optimistic than they have been in the past two years. The final leg of a bull market, before the next bear market, is the "euphoric stage" - and that's the danger zone. But that comes later. Expect to enjoy 2025. - In Fixed Income, Securitized Credit Might Be the Sweet Spot
Our central view heading into 2025 is that we believe monetary policy will outpace current market expectations, driven by moderate growth and a bumpy, yet persistent, disinflationary trend. While the base case remains economic data-dependent, the post-U.S. election environment has made it increasingly policy-dependent as well. If fiscal dovishness materializes amid higher tariffs, we anticipate further upward pressure on yields, steeper yield curves and rising risk premiums, ultimately pushing terminal rates higher. However, we believe markets are currently priced on the hawkish side of our base case. On the other hand, a moderating monetary policy, coupled with a strong consumer, robust corporate balance sheets and healthy investor demand for risk should bode well broadly for fixed income spread sectors. Overall, we believe the best opportunities will be in securitized credit, particularly U.S. MBS. - Stimulus Fatigue: China Can't Band-Aid Its Way to Recovery
Since September, Chinese policymakers have focused on delivering a series of stimulus packages to inject new life into their struggling economy and boost share prices. However, high debt levels, overinvestment, an unresolved property bubble, underwhelming domestic consumption and international trade pressures all contribute to the structural weaknesses in China's economy that stimulus packages alone cannot resolve. Lessons from other debt-laden economies suggest the path to stability requires cleaning up bad debt through either write-offs or restructuring, followed by bank recapitalization. This approach is undeniably painful, but without such drastic measures, stimulus packages will continue to provide fleeting relief. Deeper transformation must occur in China for lasting economic health. - The Potential Impact of Generative AI on Private Markets
The potential impact of generative Artificial Intelligence (AI) on private market performance is expected to be a key theme in 2025. While private equity is expected to participate through both investing in "AI-natives" and companies that attempt to expand revenue and profitably through AI applications, we recognize that some of the earliest opportunities are identifiable in private infrastructure. Two key infrastructure-related themes driving this have been the digitization of society and economies, and the global energy transition. These two mega themes meet where data requirements lead to power demand, and this is leading to extensive investment opportunities.
Please visit: The BEAT- Outlook for 2025 for further details on our Portfolio Solutions Group's views for the year ahead.
