As we embark on 2025, “cautious optimism should be the mantra for this year,” advises Tom Stevenson, investment director at Fidelity International. While markets present opportunities for growth, they are tempered by rising risks that demand a strategic approach. In his latest investment outlook, Stevenson underscores the importance of diversification as the cornerstone for navigating today’s complex financial landscape. By balancing exposure to potential growth areas with strategies to mitigate risk, investors can position themselves for steady returns amidst ongoing economic uncertainty.
Investors have enjoyed a remarkable two years since stock markets bottomed out in October 2022. But a maturing bull market is a tricky one to navigate. In his latest investment outlook Tom Stevenson, investment director at Fidelity International, makes the case for a diversified approach to markets in 2025 and suggests four funds to help investors apply this principle to their own portfolios.
“2024 looked in many ways like a re-run of 2023. A year of positive investment returns overall, with a strong start and finish punctuated by a soggy summer. In both years, markets responded to changing expectations about inflation and interest rates. But last year politics was also thrown into the mix and the re-election of Donald Trump was the defining event. The biggest mistake in 2024 was not to be bullish enough.”
What does 2025 hold for investors?
“How a second Donald Trump term shapes up will be one of the key drivers of markets in 2025. So far, investors have responded positively to the new President’s pre-announced policy platform. The expectation is that Trump 2.0 will mean tariffs, tax cuts, immigration curbs, and less regulation. This could be inflationary and result in a more unstable environment for global trade – but it does argue for continuing economic growth, especially in the US.
“At the same time, the fall in interest rates that began in the autumn should continue through 2025, even if it is slower and goes less far than was initially expected. Inflation is clearly not beaten yet, but it feels like it is under control. Growth, disinflation and rate cuts are a healthy combination for investors.
“The biggest potential headwind this year is the fact that this good news story is now well understood and has been priced into markets. The equity bull market is increasingly mature. The rise in share prices since the financial crisis is now on a par with the two great bull markets of the post-war years. When shares start this highly valued, future returns have in the past tended to be unexciting. Valuations tell us little about the short-term outlook, but they are a good guide to longer-term prospects.
“The key risks to keep an eye on in the coming months are inflation and trade tensions. There are some striking similarities between the path of inflation in the past couple of years and its trajectory in the late 1960s and early 1970s. Then, as now, it looked as if inflation had been tamed only for it to return with a vengeance.
“All said, 2025 could be another positive year for investors. But the challenge in the months ahead will be to maintain an exposure to the positive growth outlook while managing the increasing risks. Diversification is one good way of doing this. Dripping money into the market rather than going all in is another. Maintaining a good cash buffer to cover your expenses, so you are not forced to sell investments after a temporary setback, is one more. Cautious optimism should be the mantra this year.”
Four fund picks for investors to consider
“Turning to my 2025 picks, I’m optimistic but cautious for the year ahead. We’ve had another year of strong returns, and the bull market is another year older. But I’m conscious that momentum remains positive. The Trump Trade is not played out yet. My fund picks aim to participate in it while tilting away from the higher-priced parts of the US market.
· “My first pick is the Brown Advisory US Smaller Companies Fund. Trump 2.0 should favour smaller, more domestically focused US companies. And their valuations are less stretched than the tech giants. The Brown team is experienced and has a conservative approach to bottom-up stock selection.
· “My second pick is the Dodge & Cox Worldwide Global Stock Fund. I’ve recommended this fund before and it has delivered well. It gives us global equity exposure but with an underweight to the US. That reflects its value-focused approach, although the managers are pragmatic. They will invest in growth if they can buy it at a good price.
· “This year, I’ve decided to stick with the Fidelity Global Dividend Fund. As interest rates fall, investors will start to look beyond cash to generate an income. I’ve long been a fan of this fund, and its manager Dan Roberts. It has delivered steady growth despite being underweight the US market. I like its strong valuation discipline.
· “My final pick for 2025 is more of a wild card. International Public Partnerships Limited is an investment trust that invests in essential, low-risk infrastructure. Things like schools and hospitals, transport and renewables. The stuff that people rely on for their daily lives and which the new UK government says it is focused on. The trust offers a good dividend yield, and it has been growing its payout steadily over many years. At the time of writing, the trust also trades at a significant discount to its underlying net assets, so I think this could be a good entry point.
“As ever, I will be investing in all four picks in my own portfolio.”
Tom’s Investment Outlook is available in full here, with further details of his four fund picks included here.
About Tom Stevenson
Tom Stevenson joined Fidelity in March 2008, before which he worked at Investors Chronicle, The Independent, Hemscott and the Telegraph, where he continues to contribute a popular weekly column on the markets. As an investment director for Fidelity’s personal investing platform, he analyses the latest markets, and economic and business news to help explain developments to our customers.
