Can the Grinch steal Christmas 2025?

As we approach this wonderful time, it is an opportunity to reflect and to be grateful. In the case of our investments, we are grateful that, despite having a supercharged geopolitical calendar in 2024, and concerns about slowing economic activity and the risk of Central Banks' policy missteps, we are closing the year with very healthy returns.

This is also a perfect moment to consider what went well, what we learned and what to expect in 2025.

Lights, camera, action

Picture this. The curtain opens and the movie starts. Millions of people look at the sun with dark glasses, while millions more cast their ballots into election boxes. The speed increases: soldiers quickly grab their weapons; a missile lights up the night sky; voices yell in the streets of Paris, Seoul, or Damascus; a presidential candidate escapes an assassination attempt, clenched fist raised in the air. Cut!

No, this is not the trailer for a Hollywood movie. It is something a lot closer to reality. These events have marked a year that is not finished and yet, with a plot that is much closer to an action thriller than a holiday comedy, 2024 is on the stairs to receiving a few awards for being a year with relatively calm financial markets and cheerful performances. How was this possible? You may ask yourself.

It was difficult to keep your eye on the horizon in a year marked by such economic and geopolitical uncertainty. Do you still remember how experts predicted a recession along with many, many rate cuts by the Central Banks to try to stimulate an economy in need? And let's not forget the elections in more than 70 countries, including the USA and snap elections in France and Germany. Yet, much like the children in Dr. Seuss stories who don't seem to get easily scared anymore, financial markets seem to have developed an immunity to geopolitical events.

Throughout the year, it became increasingly clear that while these events are extremely significant for us as citizens, they often carry less weight for financial markets. Investors tend to focus on economic activity - interest rates, profitability of companies and valuations – rather than on political events, as long as they do not dramatically change the economic landscape.

Not a bad year!

In the financial world, there was much to be optimistic about, even amidst ups and downs. Our patience paid off: as we speak, the MSCI World Index is up 22%[1] with equities once again outperforming fixed income and cash - areas where we intentionally allocated less capital this year.

We had reasons to be optimistic: growth exceeded expectations, disinflation persisted, and earnings grew. These are the three key factors we closely monitored, sprinkled by a long list of insights that prompted us to implement 16 changes in our model portfolios across our three currencies in the last eleven months. After all, tactical asset allocation earns its name for a reason.

Staying Positive (even if the market feels a bit Grinchy)

The fundamentals of the global economy remain robust, and we entered the year with a positive view on the markets. We must admit that the scale of equity market performances surprised even us - otherwise we would have gone all-in on stocks. Nevertheless, we benefited from our overweight in equities, particularly in the U.S., which now accounts for 73% of the global stock market. That concentration coupled with rising prices has stretched long-term valuations significantly with the MSCI World Index's Price-to-Earnings ratio now reaching up to two standard deviations above its historical average. For those brushing up on their statistics, this means valuations are at levels that occur only 2.5% of the time, making the market environment exceptionally unique.

Market sentiment has recently turned quite bullish. US markets welcomed Mr. Trump with more enthusiasm than 2016, delivering a solid return of 4.5%[2]. Last, but not least, sell-side strategists are much more optimistic today: they expect the S&P500 to close 2025 about +10% higher than today. It is a stark contrast to their forecast a year ago, when they expected just a 2% upside for 2024.

This widespread optimism in the markets – after such a strong year – can raise some concerns. Investors may be too complacent, and this could increase the likelihood of a technical correction. After all, many of the concerns that the market had are still there, with new ones emerging on the horizon.

Can the Grinch steal Christmas in 2025?

As we stand, financial markets seem poised to enjoy a very merry Christmas in 2024.

However, there are things that keep us up at night. Uneven global growth tops the list: the U.S. is growing at 3%, while Europe edges toward recession, and China falls short of its 5% target. Inflation risks from U.S. policies could mean higher rates, lower wages, weaker consumption, and falling earnings— leaving Europe and China poorly positioned to offset any U.S. slowdown.

Protectionist measures like tariffs may overshadow market-friendly policies, and markets remain heavily reliant on a few tech giants—only Apple, NVIDIA, and Microsoft together account for 20% of the index, making them vulnerable to shifts in AI expectations. Finally, while the Middle East conflict is contained, the risk of escalation lingers.

Stretched sentiment and equity valuations have recently tilted the balance of risks and, hence, we recently decided to reduce our equity positioning to neutral and increase cash. (check out our latest Mosaique Asset Allocation and Markets perspective for more details.)

Let's move to you, dear reader. How can you, as investor, be prepared to weather such type of events?

Building a financial portfolio requires time, patience, and care.

For starters, set an objective: will the funds be your main source of income, or should they compound until the next generation?  Diversify your assets between equities, fixed income, and cash, each of them will help you at different times. Look at the horizon; the further you look, the better. A long-term horizon will give you perspective and prevent you from selling when panic arrives. We know it can be difficult in a digital world flooded with headlines, but sometimes it is better to hold tight, focus on fundamentals and remember why you set sailing the first place.

Finally, Finally, remember to buy protection when markets are strong, as this is when volatility is low. You will thank it later, with some peace of mind at a very attractive price.

If despite this initial advice, you are still unsure about how to act, don't fret and connect with us. We are here to help you navigate next year with confidence and clarity.

^{[1] As of 11 December 2024 in USD?}

^{[2] As of 11 December 2024 (in USD)}