Prediction time! What’s the outlook for 2025
Epsilon Money
We are an integrated new age wealth management firm, building our presence across India and eventually Asian markets.
Thousands of experts study overbought indicators, head-and-shoulder patterns, put-call ratios, the Fed’s policy on money supply…and they can’t predict markets with any useful consistency, any more than the gizzard squeezers could tell the Roman emperors when the Huns would attack.”
Peter Lynch
It is customary for all economists, analysts, investors and market observers to make predictions about the markets at the start of the year as if markets can be measured in neat calendar buckets and they start in January and end in December. However, most commentators need a reference point and usually this is as good a time as any to make a 12 month estimate of how markets are likely to behave.
Let’s take the bull by the horns, what is the biggest worry for this year?
Valuations, valuations and valuations
Globally equity markets have witnessed multiyear positive returns, and this is the major worry across all participants that should some unforeseen events happen this year, could this year be the one that reverts to the mean??
Secondly 2024 was a great year for other assets such as Gold, Cryptocurrencies and in some countries Real Estate. There were reasons foreach of these asset classes to do well last year:
Gold: Global central banks followed the Chinese central bank into increasing gold reserves, leading to an unprecedented 28% increase in the value of bullion this year to an all-time high.
Cryptocurrencies: Buoyed by the Trump victory crypto bulls piled on to all kinds of cryptocurrencies to record a banner year for these assets.
Real estate: Record sales generated by the wealth effect is creating an appreciating impact on the prices of apartments and houses. This phenomenon is usually an adjunct to multiyear stock market increases as has been seen in earlier years.
With equity markets turning tepid post October recording some real drawdowns, investors addicted to seeing significant positive returns may be tempted to diversify across risk assets that have done well viz. Gold, Real estate and Cryptocurrencies
However, that is a red flag. All factors leading to significant gains in these assets are not likely to follow through this year. Chinese gold buying is easing, the cryptocurrency situation is conflicted with Trump’s stated objective of a strong dollar – given the reality of this situation it is very likely the market will correct eventually in this asset class as well. And once the wealth effect erodes, real estate prices generally tend to come off leading to a general lack of liquidity with most investors.
Who’s afraid of a bear market?
Every drop in the stock market does not mean a bear market
“You make most of your money in a bear market, you just don’t realize it at the time.”
Shelby Cullom Davis
Investors fear volatility however each drop in the market cannot be termed as a “bear market”. Given the changes in the global markets, it is likely that markets remain volatile for a considerable period. However, bear markets arrive on the back of significant economic hardships, constrained credit markets, continuing high interest rates and inflation and endemic slow grow growth due to certain factors. We see none of these events play out this year
This means that the volatility we will see could be short and shallow. Being an equity investor in this time may be challenging but certainly not as difficult when catastrophic events lead to dramatic drawdowns as witnessed recently during the pandemic and earlier during the global financial crisis.
Markets will be markets
In other words, they will be unpredictable! Adequate diversification, assessing one’s risk tolerance and avoiding extreme allocation would be the key to ensure a good year in the financial markets this year. By extreme allocation we mean, not loading up the truck in equities one very fall (one can use up all ones’ resources, and yet see another dip thereafter) nor staying away from the equity markets in fear of erosion in market value in a volatile year.?
Staying true to ones’ risk profile allowing for market volatility to erode asset value in the interim and ensuring diversification to ease the pain of short-term losses should be the mantra for this year.
Wishing everyone a happy 2025!