There are many predictions and ideas for the 2025 market outlook, and it may seem pointless to write about them. However, it’s essential to understand the current state of the world and how others view the markets. I don’t make predictions, as I’m uncertain about the future; instead, I digest a wide range of information, recap the previous year, and highlight the most important metrics and areas of focus for the coming year to guide my investment strategies.

Macroeconomics and market outlooks are useful for developing investment themes and identifying suitable investable ideas. Additionally, portfolio positioning is crucial. It’s important to ensure that investments are either protected against downside risks or adequately exposed to equities during a continued bull run.

As always, I strive for balance. I dislike the idea of being fully invested in equities during a bear market or holding all cash during an exciting bull run, potentially missing out on returns. I try to balance these perspectives to ensure peace of mind.

Currently, I see opportunities for a continued bull run, but I am also mindful of the overextended valuations across the markets, particularly in the US and India, and I aim to have calculated exposure to these areas.

It’s always a balancing act, as I consider discounts versus premiums in other markets, bond yields, fixed deposit rates, property yields, and weigh the pros and cons of each option. For me, investing spans all asset classes, so opportunity cost isn’t just a matter of equities versus equities, but also equities versus real estate, private equity, etc.

Before we dive into the 2025 market outlook, we need to look back at the year we just had. Here is a highly distilled breakdown of the markets and the economy in 2024.

🪞 A recap of Markets and the Economy in 2024.

The year 2024 was an incredible time for investors, particularly in the US and India. I was heavily invested in the Indian markets, and the wild bull run over the last couple of years has been nothing short of spectacular. My mutual funds in mid and small caps have returned 60%, while stable multi-asset funds have yielded returns of around 40%.

With the S&P 500 and ASX300 also generating impressive returns, it was a favourable time to be exposed to various equity markets.

Other markets remained relatively flat; European markets, Japan, and other developed countries did not come close to the gains seen in the US, largely driven by the performance of mega-cap technology companies.

Inflation is no longer the primary concern in many countries. Although it has not met desired target levels, it remains manageable and within a reasonable range. Interest rates are expected to decrease as the Fed and other reserve banks worldwide begin to lower them. This trend typically stimulates both the economy and the stock markets.

Why is this important? Lower rates mean that borrowing increases, making debt easier to service and improving the balance sheets of debt-fueled businesses. This, in turn, enhances cash flow, allowing companies to reinvest in their operations and fuel growth. Debt becomes more affordable than equity when interest rates decline because the Weighted Average Cost of Capital (WACC) is always measured against the cost of issuing new equity or borrowing. Small caps tend to thrive in a low-interest-rate environment.

📈 One of the best runs in markets and asset classes we’ve seen in years…

Will the 20% growth experienced in the US over the past two years continue? And can the wild bull run of Indian stocks last? I don’t believe so. While markets might continue to creep higher, at some point, earnings and underlying fundamentals need to catch up.

Currently, I think that both Indian and US markets are not cheap, yet they are also not overly expensive. They may continue to rise, stretching multiples and valuations even higher, or they may revert to more average price-to-earnings and valuation metrics. Valuations are currently above the median average, which raises some concerns.

Bond markets remain stable, but I believe their appeal for safety and reasonable returns isn’t as strong as it was 1-2 years ago. As rates decline, bond yields also fall, and capital flows to other asset classes that offer better yields and returns.

In 2024, there was an increasing influx of capital into private equity and private debt markets, indicating that the opportunity cost is no longer tied to public markets. We’ve seen a long string of delistings across major markets and a slowdown in IPO activity, suggesting that companies are finding alternative sources of capital—either through debt or private equity. I am also noticing more later-stage IPOs from established companies that have already tapped into large pools of capital.

This trend is likely to continue into 2025.

🔑 To me these were the key highlights of the year.

• Trump 2.0 is underway and will dominate the year ahead.
• AI was the hot sector of the year…again.
• $US Dollar grows stronger and rises against major currencies.
• S&P 500 hits 2 year run of above 20% annual growth.
• Gold is up and on a historic run above 20%.
• Silver up over 30% in 2024 an 11 year high.
• Bitcoin rose again and had a fantastic run.
• Indian Equities markets let with a huge bull run on almost all equity funds.
• European markets remain flat and undervalued compared to the US.
• Europe has continued stagnation, especially in Germany.
• Chinese markets are undervalued and the economy is still at a low.
• Inflation remains sticky yet manageable across developed countries.
• Interest rates globally look set to taper downwards and the trend has begun.
• War rages on and doesn’t look like it’ll slow down anytime soon.

🔮 The 2025 Market Outlook…

You can’t start discussing 2025 without addressing the most dominating headline: Trump 2.0. The world will watch his policies and how he handles the current state of affairs. His comeback has been significantly more positive for markets than negative.

The big questions are: Can the current bull run continue throughout the year? Will U.S. equities continue to dominate? Can gold reach all-time highs? Can Bitcoin also make significant gains? Will Indian markets slow down, and can China make a resurgence? So many questions arise.

The themes this year are unlikely to change from those of the last couple of years: AI, the Fourth Industrial Revolution, technological advancements, energy, FMCG, infrastructure, defense, and healthcare. These remain key themes even now.

Defence spending will likely increase as geopolitical tensions rise, especially with Trump signalling a desire to reduce U.S. involvement in global policing and push defence costs onto allies and neighbouring partners.

As an investor focusing on emerging markets and small caps, I believe the cycle will shift from large-cap and mega-cap stocks, with new capital flowing into underappreciated sectors. I think a more thematic investment approach will work well, while still emphasising fundamentals. There are many interesting and important megatrends in play; if investors tread cautiously, they can identify the winners of the next cycle.

While some mega-caps that have driven the overall markets remain strong and earnings growth is robust, this cannot be said for many areas of the market that have risen alongside them. The phrase “a rising tide lifts all boats” was evident in 2023 and 2024, with the exception of a few sectors and asset classes. However, I remain skeptical about many companies boasting ridiculously high valuations as earnings growth disappoints.

⚠️ Overall, I am cautious about valuations.

The market seems a bit euphoric to me, especially in India. There is a huge opportunity; however, it is a stock picker’s market where carefully assessing every company is crucial. What you choose NOT to invest in will be as important as what you do invest in.

I suspect a market correction is on the horizon, but I can’t predict how much or when it will occur. We saw Indian markets rebound, and there is a smoothing out of price points on major indexes. It could be a slow start to the year, followed by decent growth in the middle, but as mentioned, valuations are high. Everyone seems to expect markets to continue rising; everyone I talk to is bullish, and these are moments when it’s wise to think a bit contrarian.

Neglecting certain points in preparing for a downturn can hinder your ability to survive and generate above-average returns. This isn’t about timing the market or avoiding it entirely; it’s about buying solid companies or indexes during periods of volatility and corrections. We witnessed this towards the end of last year.

Overall, I believe markets will stabilize, and the “Goldilocks” scenario—where the market rises as interest rates fall—could extend the recent gains we’ve seen. This creates a not too hot or cold economy.

Decreasing interest rates typically benefits markets overall. There will always be tit-for-tat trade wars and geopolitical tensions; however, global capital markets remain strong.

I will be focusing more on the capital cycle. With large caps and mega caps appearing a bit stretched and bond markets potentially less attractive as rates fall, the question becomes: Where will this capital flow next? What sectors, asset classes, and markets will be targeted?

🔑 Key Points in the 2025 Market Outlook…

• Trump 2.0 and how it will impact global markets and trade.
• Can the 2-year bull run continue into 2025?
• Can earnings and fundamentals back fill these higher valuations?
• Will a drawback or bear market occur Q4 of 2025?
• Will AI be the continued hot theme of the year?
• Can Gold, Silver and Bitcoin continue its rally into new highs?
• Geopolitical Tensions and war and the impact on markets.
• Interest Rates coming down and inflation remaining stable.
• Emerging Markets being the spotlight of the next bull run.
• Capital rotation out of large caps into small caps.

These are the key points regarding what lies ahead. I remain focused on Indian markets, Asian markets, and developed markets, looking for companies that align with the themes and fundamentals I’m pursuing. Certain sectors are expected to benefit from the current global climate, including defence, infrastructure, technological advancements, cybersecurity, AI, fast-moving consumer goods (FMCG) in emerging markets, and energy solutions.

Apart from themes and megatrends, fundamentals should take precedence. There are many strong companies that did not rise alongside the AI and tech craze, and their valuations remain attractive. Earnings growth should be a core focus if pursuing higher valuation growth stocks. It’s essential to ensure that companies are well-capitalised, that revenue and sales are increasing rapidly, and that high gross margins are maintained.

🔍 Focus on Fundamentals…

A high valuation is not necessarily unattractive if I believe the company can support it with substantial growth. Balance sheet strength will be crucial; if volatility arises, companies need to withstand that turbulence.

Additionally, for investors looking to capitalise on certain themes (I will be writing about thematic investing soon), it may be beneficial to move downstream of the “Big Idea” and identify beneficiaries within the overall sector. For example, energy is critical for AI development. An AI search uses ten times more power than a Google search, making energy a foundational element for the potential boom in AI. Thus, there are ways to gain exposure to themes while optimising the risk-reward trade-off.

The US market appears to be reaching a peak compared to other markets. While the US is home to many companies that drive significant returns, the market’s premium over exchanges like EURONEXT, as well as countries such as China and Japan, remains notably high. In contrast, emerging markets seem more attractive from an undervaluation perspective. This is an important consideration for global investors.

📰 Key Points from a range of sources…

I’ve read over 100 reports, market outlooks, research papers, and articles about the future of the markets, and a common theme emerges from all of them. The pointers below align with my own assessment and outline areas to observe, but they don’t limit my ability to focus on what I have always prioritised.

Just because the media, investment banks, brokerage houses, and government sources produce these reports and market predictions does not mean you should be swayed from your overall objectives. I use this information as a “Big Idea” to understand what everyone else is looking at and thinking about in the markets, which helps me position myself appropriately.

You should leverage these macro ideas and highlights to identify compelling investment opportunities as these trends unfold. For example, defence spending has increased significantly, and countries are encouraged to allocate 2-4% of their GDP toward defence. That’s a staggering figure; obviously, defence companies and any businesses supplying products or services to this sector will benefit from the geopolitical tensions.

Don’t be deterred by news, negative outlooks, or even overly positive predictions. Instead, position your portfolio accordingly and use these highlights as a “Hunting Ground” for investment ideas.

👁️ 2025 Market Outlook Core Themes to watch…

• Artificial Intelligence (AI): AI is expected to continue driving market trends and innovation across various sectors. The market for AI is projected to grow significantly, reaching $1.8 trillion by 2030, according to Statista.
• Geopolitical Tensions: Geopolitical risks remain a significant factor, with multiple countries involved in conflicts. This could impact markets and investment strategies, particularly in sectors like defense and cybersecurity.
• Interest Rates and Inflation: Interest rates are expected to remain elevated compared to pre-pandemic levels, with inflation possibly staying sticky. This could influence investment decisions and market performance.
• Economic Growth and Corporate Profits: Despite geopolitical risks, economic growth is anticipated to remain robust, with corporate profits expected to grow in the low double digits. This could support equity markets and provide opportunities for investors.
• Market Concentration and Diversification: There is a trend towards market concentration, with a few large technology stocks dominating returns. However, there is also a shift towards broader market participation and diversification.
• Renewable Energy: The transition to renewable energy sources is accelerating, with renewables expected to generate more electricity than coal for the first time in 2025. This trend is likely to drive investments in clean-energy technologies.
• Private Markets and Capital Allocation: Capital markets, especially private markets, are seen as vital in financing the transformation driven by mega forces like AI and the low-carbon transition.
• Thematic Investing: Thematic investing, focusing on specific market trends and societal changes, is gaining popularity. This approach can provide opportunities for above-average growth in emerging industries.
• Asset-Light Companies: Companies in technology, healthcare, and other sectors are becoming more focused on intellectual property and less burdened by heavy infrastructure, leading to greater flexibility and productivity gains.

These themes and outlooks provide a framework for investors to navigate the complex and dynamic market environment of 2025

🍰 Portfolio Positioning…

This year, my portfolio strategy will focus on the likelihood of market downturns rather than an extended bull run exceeding 20% returns for a third consecutive year. This means I will prioritise having access to cash and taking profits from investments that have exceeded my expectations, such as gold, specific indexes, and stocks. I plan to reinvest these profits into undervalued sectors or themes that interest me.

My main focus areas include US and ASX small-caps, Indian equities, and Southeast Asian equities. For income investors, locking in the last of the higher interest rates on some excess cash may be a wise choice, as we are unlikely to see 5%+ deposit rates from banks for some time as interest rates decline.

Additionally, I want to protect myself against currency risk, especially since I transact globally across multiple exchanges and currencies. The rise of the US dollar may benefit the US economy, but it poses challenges when dealing with other currencies.

From a fundamental perspective…

I aim to position my portfolio to capture higher returns from growth stocks while balancing it with defensive positions in undervalued infrastructure, FMCG (fast-moving consumer goods), consumer staples, and certain critical metals and commodities. Achieving this balance is crucial.

Currently, a hybrid asset allocation strategy appears to be a winning approach for portfolio positioning over the next year. While I remain bullish on Indian equities, I find them expensive; the price-to-earnings ratios and valuations are stretched, and earnings must catch up with these valuations.

I am also monitoring the mergers and acquisitions (M&A) space, as well as the initial public offering (IPO) markets across Asia, where results have been mixed.

One constant, however, is the importance of identifying small-cap stocks in any sector that possess the winning ingredients: good management, a sector with a positive tailwind, strong capitalisation, low to no debt, healthy gross margins, free cash flow, year-over-year revenue growth, and year-over-year earnings growth. When you find companies with these characteristics, their location or industry becomes less relevant.

The recipe for success in finding winning stocks rarely changes.

🙏 Good luck in the year ahead, and happy investing!