Kirsten Boldarin, Mint Asset Management wholesale head of distribution, considers the potential market trajectories of the year ahead as the global economy flies into new conditions…
For much of the past few years, there has been an ongoing debate about whether the US was going to experience a ‘hard landing’ or a ‘soft landing’. Back in the tail-end of 2023, the mainstream view was an eventual ‘hard landing’ – the economy under pressure from elevated levels of inflation would be forced into a recession, borne down by the weight of the rate hikes necessary to curb that inflation.
Then, as inflationary pressures eased, the consensus narrative shifted to a ‘soft landing’ – a slowing economy but not a hard recession, more like a bumpy touchdown.
And yet, the US economy continued to surprise with its resiliency to the point now where ‘no landing’ now seems plausible. The Fed has cut interest rates and US growth is running at a nominal rate of almost 5%. Throw in the prospect of Trump tax cuts and deregulation plus a boom in AI-induced productivity and it is no wonder that equity markets were off to the races in 2024.
The US has always been the focal point of geopolitical or market discussion, but it soaks up even more of our attention today because of its dominance. Going back a decade, the US equity market was less than half the weight of the MSCI All Country World Index, today it is more than two thirds of it.
The US Dollar has also been in the ascendancy. The Fed’s calculation of a trade-weighted Dollar basket shows it has gained 40% over the last decade. The market has always focused on the US economy, but it will do so even more today because of its centrality, and this is why much of our discussion below is so US-oriented.
- The Fed’s interest rate decisions
We all want to know what the Fed will do with respect to interest rates in 2025. They do too! But they are, like us, waiting on the data. They do not know much more than we do and right now, the picture is muddled.
In 2024, the Fed cut rates by 100bps – an initial 50bp cut and then two 25bp cuts. The latest cut was, however, accompanied by a hawkish narrative (a shift from the earlier talk) which rattled markets and caused stocks to dip. Previously, the Fed had indicated a 2025 path of a further four rate cuts, now reduced down to just a forecasted two, given inflation has picked back up again.
Based on the current data, we see a strong US consumer (although this is heavily skewed by socioeconomic groupings), and US jobs growth has remained strong. While we don’t anticipate a sharp reacceleration in inflation, we do see inflation being stickier at this level and that US rates will remain higher than the market is anticipating. There are also several growth-centric policy changes coming down the pipe.
We have reflected this view in our duration-positioning. Our fixed income allocation is underweight duration – ie less sensitive to changes in interest rates.
- The significant shift from globalisation to deglobalisation
Back in the 1980s, white men working without a college degree made about 7% more than the average American worker. Today, they make about 10% less than the average worker[1]. Globalisation, in particular NAFTA, a free trade deal which took effect in 1994, wiped out non-college educated manufacturing jobs as these were either automated or shifted overseas. With Trump coming to power on the back of many of these voters, we will now be moving forward with a deglobalisation agenda – a material change in policy.
Trump’s proposed primary deglobalisation tool is tariffs. The latest Trump announcement is to impose a 25% tariff on Canada and Mexico and 10% on China. At this stage it is difficult to discern what is a negotiating tactic and what will actually come to pass.
From a domestic US perspective, imported goods only make up about 10% of personal consumption expenditure[2]. So, the inflation implications for the US are likely to be low even if tariffs are raised.
However, for the rest of the exporting world, the impact will be much more profound from a demand perspective. This may prompt a retaliation and there are risks of an escalating trade war. But aside from China’s significant position in US Treasuries, most of the rest of the world is not in a particularly strong negotiating position.
Just as we became armchair virologists in 2020, we are likely to all become supply chain experts. It will be fascinating to see the interrelationships and the implications of a great trade decoupling transpire over the coming years.
We anticipate that the trade-related rhetoric and Trump rhetoric in general to create a higher degree of market volatility than was the case in 2024. It will likely take some time before we settle on actual policy implementation and the intervening period could be messy.
- The absorption of the US debt burden
This has been a low-key issue bubbling away in the background and has never made it to the foreground. We think this will change in 2025.
This stat was fascinating – the average US weekly debt issuance in 2024 was $573bn, that is roughly equivalent to the entire quantum of debt of the Australian government. That is a big number to auction (and service) each week! US debt-to-GDP is currently 121%[3]. That in itself is not a problem provided the US can continue to grow.
In fact, the debt-to-GDP has fallen despite $6 trillion of spending because of growth. There is, of course, DOGE – the newly formed Department of Government Efficiency to be led by Elon Musk and Vivek Ramaswamy which will look to cut government spending. However, the two key areas which would naturally be a source of large cuts (Social Security and Medicare) have been deemed off limits by Trump[4].
We anticipate that because of the quantum of issuance, there may be a Treasury absorption problem, and this could cause some serious market angst with a backup in yields and a Dollar wobble. However, a market correction of this nature would likely be a buying opportunity (unless accompanied by material growth concerns).
- Artificial intelligence and the market
AI has attained the fastest rate of adoption of any new technology in memory and has sparked an enormous spending boom. This spending boom has incorporated not just software but hardware, too, in the form of data centres. We have been the beneficiary of this trend with positions in stocks like NextDC and Infratil.
The boom in AI has also driven increased stock market concentration. Back in 1995, the top 10 stocks in the S&P 500 were dominated by oil and conglomerates (think GE, Exxon, Coca-Cola, AT&T). Today, the top 10 is tech-centric. What is interesting, though, is not only the concentration, but the EBITDA growth. In 1995, the top 10 had an average annual EBITDA growth of 10%. Today, the top 10 have an average EBITDA growth rate of 29%[5]. These stocks also have far less debt. To date, much of their dominance has been backed up by earnings growth rather than merely hype. However, more recently, it feels as though some hype has started to creep in.
NVIDIA was once again the market darling in 2024, but competition is on the horizon. Google just announced Willow, a new quantum computing chip – not a direct NVIDIA competitor and still in its early stages, but it claims that Willow performed a computational calculation in five minutes that would take one of the worlds fastest supercomputers 10 septillion years to calculate. Others (eg AMD), will continue pushing hard to catch NVIDIA.
We expect some of the gloss to come off the AI-dominant names and for the market rally to broaden and deepen beyond the Magnificent 7. We therefore may see indices stumble because of the weight of the names within them, while the rest of the market holds up. Within our Growth Fund, we have a well-diversified helping of global equities which we think is a more comfortable investment place than the now highly concentrated stock indices.
- And what about New Zealand?
While it has been economically bleak, there is cause for some optimism. The RBNZ has cut rates, and inflation doesn’t appear to be intractable. Wage inflation in the latest data was well-contained and the minimum wage will increase by only 1.5% next year.
Therefore, the RBNZ has scope to continue to cut rates to meet the downbeat economy without fears of stoking inflation. Those rate cuts will be a significant help. In NZ, the transmission mechanism from headline interest rates into the mortgage market is much more efficient than in the US. Therefore, the pain is sharp, but the relief is too. Mortgage rates have peaked and are likely to now offer relief to homeowners. Business confidence has picked up from very low levels – realised activity is likely to follow. There are also signs that the fiscal clampdown will ease with Finance Minister Nicola Willis saying recently that the government has a responsibility to invest in infrastructure (albeit not as sizable investments as was the case under Labour).
We remain optimistic about the outlook for New Zealand equities and see rate cuts benefitting stocks because of the yield sensitivity of our underlying market and because of the inducement that this will provide to move the substantial amount of capital sitting in term deposits off the sidelines and into the markets.
We are excited for developments not just in the markets in 2025, but within our own team. At Mint, we have always viewed the efficient use of quantitative techniques to assess investment data as a core part of our investment process.
With the advent of artificial intelligence, we are determined to remain future-focused. Marek Krzeczkowski has been leading a project to incorporate artificial intelligence (specifically reinforcement learning) into our multi-asset models to support tactical asset allocation decisions. In investing there is no ‘silver bullet’ but our early results look promising. We look forward to bringing you more detail on this in the year.
Last year we heard a lot of mention of ‘survive to twenty-five’ – we are more in the camp of ‘thrive in twenty-five.’ Bring it on!
The Mint Asset Management Team
Disclaimer: Kirsten Boldarin is Head of Distribution at Mint Asset Management Limited. The above article is intended to provide information and does not purport to give investment advice.
Mint Asset Management is the issuer of the Mint Asset Management Funds. Download a copy of the product disclosure statement here.
[1] New York Times, They Used to Be Ahead in the American Economy. Now They’ve Fallen Behind. Emily Badger, Robert Gebeloff and Aatish Bhatia, 26 October 2024
[2] BEA Census Bureau and Blackrock Calculations, Sep 2024
[3] Sources: Federal Reserve Bank of St. Louis; U.S. Office of Management and Budget, Federal Debt: Total Public Debt as Percent of Gross Domestic Product, Q3 2024
[4] Donald J Trump Campaign Platform, Chapter 6: https://rncplatform.donaldjtrump.com
[5] Blackrock CIO Rick Reider Monthly Presentation, Constants, Variables, and Compounding, Dec 2024