2025: The Year of Resilience

The three things investors should think about this week:

1)    We are entering an era of profound change. The key is not to try and guess the outcome but to build resilience for portfolios and businesses.

2)    For portfolios, resilience is about streamlining appropriate information, proper assessment of risks and thinking sanguinely about the risk/reward of any given investment.

3)    For businesses, it’s about the quality of decisions made, the breadth and resilience of supply chains, the quality of the capital structure, and the investment in the right technologies.

Summary

In the economic outlook season, the key theme is policy uncertainty. Change will accelerate, some of it will be good and some of it will be a miss. This is not the linear central bank-driven economy. How do investors deal with uncertainty? Resilience. Ultimately, this is a time to consolidate, think about the future and design responses. A time to tend to fortifications, instead of brazenly expanding towards one direction, unless one has clearly mapped the road ahead. The times will test the resilience of investors and businesses, likely more than their vision for the future.

The Week ahead

On Friday, US employment data will be closely monitored by investors. Whereas markets may react to the news (they usually do), investors should consider that if the Fed once again becomes fearful of inflation enough to delay rate cuts, it will likely be because of changes in US trade policy and not tightness in the employment market. So this week we would place more emphasis on final manufacturing and services PMIs which should provide us with the global growth picture. We will also read the Fed’s Beige Book, a backwards-looking assessment of the US economy, and the OECD’s economic outlook for 2025.

There are plenty of big themes we discussed recently. Within the space of less than 45 days we have touched upon  

·         A Big Labour budget

·         A Big US election

·         Edgy bond markets as debt builds up

·         A bubbly stock market

·         Potential groundbreaking bank deregulation.

We have described a stock market in search (but not fear) of correction, in a world that gets more wobbly and where policymakers, not waiting for AI to deliver, are searching for economic growth in increasingly risky places. A world where American leadership and exceptionalism are turning to reticence, causing tectonic shifts in the global geoeconomic balance. Big changes appear to be the incoming US administration's explicit and stated goal, and big changes in the US mean risks, opportunities and big changes everywhere else. Policymakers will likely face inflation as a result of the implementation of their policies, but they also can credibly hope for a rise in real output.

Amid all the noise, the forecasts, the opportunities and the danger signs, what may be missing is the “so what? Where are you taking me?”

So What? Resilience

So today let’s take advantage of the half-week during US Thanksgiving, and take stock. Focus on what investors and businesses should do in this environment.

What are the implications of an increasingly non-linear world that will likely not be made any smoother after the official change of government in the United States?

We believe the big takeaway so far is: Change will accelerate, some of it will be good and some of it will be a miss. This is not the linear central bank-driven economy. It’s the Great Reset, after nearly a century of the post-WWII global order.  Being in the right place at the right time cannot be the foundation of a strategy, simply because the range of possible outcomes is increasing at an exponential pace. In other words, successful bets will pay off in spades, to be sure, but “getting it just right” in this world that we describe is a very tall order (which is why the big payoff for the few lucky ones).

So, for those who don’t feel like gambling, what is left is a preference towards resilience.

What Resilience Means for Investors

In a world so unpredictable, looking for success based on a “correct prediction” will be very difficult for investors, But that does not mean that they still can’t come out on top.

The key is to

a)    Get, or stay out of, more debt, especially if they plan to refinance it. We don’t mean not holding fixed income but rather making sure they do not leverage their investments more than they can afford to if the environment gets riskier.

b)    Don’t rely on the newspapers for information.

A world so abundant in information will be very difficult to make sense of. Different experts will reach different conclusions. So a seasoned investor needs to minimise the information overload from many sources, and instead focus on information from a few trusted sources.

For non-professional investors, this means becoming more attentive to the words of one’s Trusted Adviser. If someone wants frequent information on the running of their portfolio, then they should make sure they meet regularly and make sure that their wealth portfolio (as a total, not just stocks and bonds) is resilient.  What does this mean? Ask the following questions:

1)    Is my portfolio well diversified?

2)    Am I undertaking too much concentration risk (for example US tech equities)?

3)    Am I positioned to withstand a correction due to high valuations?

4)    Is my fixed income exposure protective in case Bond Vigilantes start targeting the EU, or worse, the US?

5)    Are there enough diversifiers in my portfolio?  

What Resilience Means for Businesses

For business leaders and board members, resilience means increased responsibility. This can also come in the form of asking the right questions.

a)    Is my company’s leadership (CEO, CFO, Board) aligned with the notion of Resilience?

a.     Are the right people, internals and externals, in the right place?

b)    Is my company’s capital structure resilient?

a.     Will it need to refinance debt soon, at possibly higher levels?

b.     Will it need to raise money soon, and if so what is the most advantageous market to do so?

c)     Is my company’s operational structure resilient?

a.     Are my supply chains concentrated enough to withstand disruptions in global trade?

                                          i.    Are my agents knowledgeable of their respective markets and well-positioned for a fast-paced political and economic environment?

b.     Are there contingency plans to get parts/equipment/services from alternative vendors quickly should the need arise?

c.     Can my technological infrastructure withstand increasingly sophisticated cyber attacks?

d)    Is my company keeping up with new technologies in a sensible and profitable way?

Ultimately, this is a time to consolidate, think about the future and design responses. A time to tend to fortifications, instead of brazenly expanding towards one direction -unless one has clearly mapped that road ahead. The times will test the resilience of investors and businesses, likely more than their vision for the future or the accuracy of their predictions.