Focus on the trend or ‘essence’ for better returns
In an environment where Donald Trump’s rhetoric can create significant noise, investors can focus on these key shifts
WHAT is the key difference between chess grandmasters and reasonably strong amateur players? It is the ability of these grandmasters to cut through the noise, focus on the essence of the position, and implement a plan to turn that essence in their favour.
It is actually not so different in finance – especially in an environment such as the one we face this year, when US President Donald Trump’s rhetoric can create significant noise.
Against this backdrop, there are a few key trends, or essences, that investors can focus on.
US exceptionalism turbocharged
First, “US exceptionalism”. This was already in place before Trump was elected, and it is likely to expand with his “America First” policies.
This is a powerful driver of the US dollar, which has been recording higher highs and greater lows since the middle of December.
The outperformance of US economic data vis-a-vis global data, the US Federal Reserve’s signalling of a slower pace of rate cuts, Trump’s threats of US tariffs – all help to strengthen the greenback against other key currencies.
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“US exceptionalism” was also reflected in the strong surge in US long-term government bond yields. The 10-year yield has risen past the 4.5 per cent key resistance, and may even test the critical 5 per cent level in the near term.
While we believe there is some room for the yield to come off, the essence is that the downside is likely to be limited, perhaps to around 4.25 per cent, as global growth – especially US growth – remains robust.
Lift from strong economy and earnings growth
Strong economic growth is likely to enable global equities to outperform global bonds. This is particularly the case with US equities, where strong economic growth is likely to filter through to strong earnings growth, a key catalyst for US equities.
The consensus expects the S&P 500 index’s earnings growth to have accelerated to 9.6 per cent year on year in Q4 2024, from 9.1 per cent in Q3.
This year, earnings growth is expected to further accelerate to 14 per cent year on year. All equity sectors are expected to deliver positive earnings growth in 2025, led by the technology sector (20.4 per cent).
Among US growth stocks, investors are increasingly focused on the service or infrastructure providers as compared to technology providers.
The essence here is the cost of investing in technologies related to artificial intelligence (AI).
The logic is that if the mighty technology providers themselves are paying the service/infrastructure providers to ramp up their AI capabilities, then individual investors should “follow the money” and focus on the service/infrastructure providers in 2025.
Gold’s sustained allure
Finally, the uptrend in gold is likely to continue in 2025. In fact, gold is the other overweight call in our global asset allocation, alongside global equities. Gold prices breached the 50-day moving average in early January as prices slowly regained upward momentum.
Although near-term macro headwinds for gold are building, given stronger-than-expected US job market data, US dollar strength, and the fading of Fed rate cut expectations, the essence is the robust physical market for gold, which more than offsets other headwinds.
Globally, central bank demand for gold was strong in both October and November last year. China added to its gold reserves for a second month in December. India restated its gold imports lower, but shipments still support strong underlying demand.
The total global central bank gold reserves are now at levels last seen in 1988, while gold’s share of total reserves is at the highest since 1996.
More than 3,000 tonnes of gold have been added to the reserves since the 2020 US election. This trend of increasing demand from global central banks – especially in the emerging markets – is likely to lend support to gold whenever prices pull back.
What can derail this thesis, and what can trigger volatility in the markets? Well, a US tariff-driven resurgence of inflation could force the Fed to hike rates, causing a material tightening of financial conditions and a recession in the US.
How would the US central bank respond to stagflation? Alternatively, how would it respond if Trump were to opt for an aggressive fiscal stimulus programme to support growth?
The Fed is likely to hike rates in this scenario, leading to an initial surge in the US dollar. However, the greenback is likely to eventually plunge, as the prospect of yet more fiscal stimulus spooks investors about deteriorating budget deficits. Gold and real assets are likely to do well in this scenario.
This leads to the ultimate essence of managing our investments: Maintaining a broadly diversified portfolio that can ride out most macroeconomic outcomes.
The writer is head of equity strategy at Standard Chartered Bank’s wealth solutions chief investment office
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