Top 8 Convictions in the Year of the Snake

The original article was authored by Fidelity International and was edited by the Endowus Insights team.

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Trump’s victory in the US Presidential election, coupled with the dividing paths of growth, inflation, and interest rates among the world's largest economies could lead to increased uncertainty but also present opportunities. 

Charting through these multi-faceted risks, Fidelity’s macro team has identified their top 8 convictions for the Year of the Snake, from US equities and USD investment grade bonds to diversification ideas with Japanese stocks and absolute-return strategies. 

1. 2025 is the year of divergence

“There is an inevitable divergence between the world as it is, and the world as man perceives it,” Former US Senator J William Fulbright noted at the height of the Cold War.

For a long time over the past couple of decades, most of us at least agreed on the direction of travel. That is no longer the case. 

As the Fidelity macro team lays out in their outlook, growth, inflation and interest rates across the world’s biggest economies are expected to head in very different directions in the months ahead and are liable to have very different concerns over the course of the year. Hence, investors may need a very different playbook. 

2. The US is poised to reflate

A landmark US election result raises the odds of an outright reflation of the world’s biggest economy. We are in the mid to late cycle, not end of cycle, creating an environment that should generally be good for risk assets but puts a premium on getting investment choices right. Valuations of a number of past winners have elevated, but the mood in general is positive.

The US soft-landing scenario, which Fidelity has as the base case for most of 2024, should give way to reflation as we move deeper into 2025, but an economy whose exceptional growth propped up the rest of the world in recent years may also now turn inward and become more protectionist. 

Note: Reflation is an act of stimulating the economy by reducing taxes or by increasing the money supply. To curb the effects of deflation, a monetary or fiscal policy is designed by the Government or Central Bank to stimulate spending and expand output. This is known as reflation.

3. US stocks will likely outperform the rest of the developed world on earnings

Growth-supportive policies propped up by more fiscal easing should push US inflation higher, reducing the risk of a US recession and recalibrating Fidelity’s macro team’s assessment of the current business cycle to the mid-to-late stage. But other major economies, and in particular Europe and China, will have to navigate a shift in US trade and industrial policy that is likely to weaken their own growth prospects and put downward pressure on domestic inflation as external demand slows.

Put together, these divergences will support US growth in 2025, but rising government debt burdens is the underlying, longer-term trend. 

Fidelity believes public finances are fast reaching their limits and that above-target inflation is likely to become the least costly option for an orderly resolution to the problem of debt sustainability.

Reflation will boost earnings, easing fears over higher corporate valuations. A pro-business, pro-innovation administration should prove helpful and lower interest rates should benefit capital-intensive industries and help cyclical stocks outperform. 

The implications of Trump’s second term

4. Capitalise positive earnings with US mid-caps

An ongoing rally in the small-and-mid-cap segments has narrowed much of the discrepancy in valuations with the top end of the market, but the coming year will provide different impulses. 

Tax cuts would benefit small businesses, as would lower financing costs. But the latter will evaporate if price rises force the Fed to change tack, and immigration and tariffs bring threats to growth and spending on the ground.

US mid-caps thus offer a way to capitalise on the country’s positive earnings momentum while avoiding the higher valuations of the market’s biggest names.

Fed rate cuts: What’s next for small-cap stocks?

5. Nerves over valuations make the case for income

There are risks to some sectors from potential tariffs and further trade frictions between the US and China, but at least some of any resulting reflation will be helpful for earnings and ease fears over higher corporate valuations. There is also a debate about heightened valuations of the big tech companies. 

The cheaper and more defensive bet currently is income: Returns from dividends and share buybacks combined in some areas of the market are running at as much as 8% and are better priced in Europe. 

6. Defensive USD Investment Grade could shelter from underpriced recession risks

Fixed income investors face tight spreads that are priced for benign economic conditions. 

With public sector deficits projected to rise, and the prospect of tariffs, trade disputes, and ongoing geopolitical tension, there is a case that less optimistic scenarios are being underpriced. This represents a potential source of value in credit markets. 

Defensive Investment Grade bonds in the US dollar could shelter investors from underpriced recession risks. 

7. Japanese stocks may see improved returns from reforms

The pursuit of Japanese companies driving shareholder value has been a key focus in the market for the past couple of years. Reform momentum picked up around 2023, with the Tokyo Stocks Exchange, pressuring all the listed companies to come up with initiatives to boost corporate value.

Into 2025, sentiment and fundamentals metrics remain supportive of Japan. It remains on track for reflation with strong wage growth, and capital expenditure and shareholder returns will increase steadily over time. The percentage of TOPIX companies outperforming the index has also been on the rise, as investors scout for beneficiaries of the country’s corporate governance reforms.

One caveat is that a strong yen combined with higher interest rates could hurt earnings later in the year, especially in the consumer discretionary sector, where overseas sales outweigh domestic demand for carmakers and durable goods exporters. 

8. Absolute returns strategies may provide diversification for drawdown-aware investors

An air of uncertainty still surrounds expectations heading into 2025, especially in light of the change in administration in the US. Positioning portfolios so that they can take advantage of the current conditions while making them able to weather a range of different scenarios is important.

Options-based and absolute-return strategies, for example, can respectively offer downside protection and diversification in portfolios even when bonds underperform. These are increasingly valuable in an asset allocator’s toolkit given latent inflation risks.

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Fidelity’s approach to stick to fundamentals

No one can know with certainty the future of US-China relations, or predict commodities’ trajectory precisely, should conflicts in the Middle East take a different turn. But with volatility comes both risks and returns. The outlook for earnings growth globally remains robust. 

With high valuations, smart money will be looking for the right homes as the economic cycle turns. Fidelity’s philosophy as a long term investor focuses on fundamentals, while staying vigilant and disciplined on valuations. This will guide Fidelity’s thinking through 2025 and beyond.

Learn more about Fidelity Funds 2 (“FF2”) – Global Discovery Fund

Some of Fidelity’s convictions for 2025 can be observed from the allocation to US equities, in particular mid-cap stocks, in the FF2 ­ Global Discovery Fund (the “Fund”).

Co-managed by portfolio managers, who each have more than 20 years of experience, the Fund has a strong value and quality focus with an opportunistic approach to invest in companies across the market cap spectrum, including the under-researched small and mid-cap stocks with strong growth potential. 

Investors looking for exposure to small and mid-cap quality global companies may consider an allocation to this Fund. Due to the Fund’s overweight to small and mid-cap companies, investors should note the potential risk of the Fund experiencing underperformance in the short- to medium-term when small and mid-cap companies are out of favour.

Endowus has eight funds from Fidelity International (as of 31 Dec 2024), including the Fidelity Funds 2- Global Discovery Fund. 

Get started building your own portfolio with Fidelity’s funds on the Endowus Fund Smart platform.

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