Reviewing the year of 2024
In 2024, things unfolded largely as I had predicted at the end of 2023: U.S. stocks and technology stocks continued to lead as the top-performing markets, with strong market potential in China, Japan, India, and U.S. small companies. The portfolio performed excellently, with Cash up by 15.46%, CPFIS up by 18.67%, and SRS up by 17.14%. The standout asset class for 2024 was U.S. technology stocks, which we successfully capitalized on. The returns of our portfolio has also outperformed the majority of our peers in the managed portfolio department for 2024. 
The decision to maintain an aggressive allocation of 80% equity and 20% bonds was largely on target. After a stellar 2023, we could have taken profit and stay on the safe side. Instead, the portfolio managed to successfully capitalized on most of the profitable sectors throughout the year. The focus on technology sector helped the portfolio to out-performed as many analyst exited the technology sector at the start of 2024 as they fear that the high valuation of the tech sector will pull down its performance. Instead, the improving profitability of the tech companies has pushed their share prices even higher.
Our small allocation to Emerging Markets was designed as a recovery play, as developing economies catch up to developed ones in the post-COVID, high-inflation period. Recovery across emerging markets has been mixed, with strong performances from China and India and weaker results from countries like Brazil and Indonesia. Despite this, the Emerging Market funds delivered a respectable 10% return in 2024, thanks to its significant weighting in China and India.
In the Fixed Income side, the longer-term U.S. government bonds underperformed as U.S. economic growth exceeded expectations, leading the Federal Reserve to scale back its rate cuts due to inflation concerns. Despite this, the small fixed income portion served its purpose as a buffer and an opportunity fund for potential future investments, effectively protecting the capital.
As we move forward, the valuations of U.S. market is becoming stretched, though positive profit growth may help to justify the valuation in the near future. It will be prudent to start taking profits this year and increasing our fixed income allocation. In this case, the fixed income portion of the portfolio will not just act as a buffer fund, but will also be optimized for medium range returns by taking on higher-risk and higher interest bonds with more predictable returns, especially as the stock market becomes more unpredictable and volatile.
The AI revolution continues to dominate the stock market, with Nvidia replacing Intel in the Dow Jones Industrial Index as the leading semiconductor industry representative. Companies involved in developing next-generation AI software and semiconductors have been the main beneficiaries. Interestingly, not all semiconductor companies have thrived in this AI boom. Intel's fall from grace highlights its failure to capitalize on the AI wave, and South Korea, another semiconductor leader, also suffered. South Korean stocks dropped by double digits, fueled by growing pessimism about the local market, exacerbated by fears of higher trade tariffs and reduced subsidies for South Korean battery producers following Trump's election. Samsung, accounting for 18% of the Kospi, hit a four-year low in November due to concerns over its weakening technological competitiveness.
Gold performed well despite previously depressed prices caused by rising U.S. interest rates. Contrary to the belief that inflation boosts gold prices, it was the falling interest rates in 2024, coupled with low inflation, that propelled gold prices upward. This trend challenges the conventional wisdom that gold value increases with inflation, suggesting instead that it reacts more to declining interest rates.
Japan continues to perform well in 2024 lead by a weakening Yen and a return of inflation, driving consumers to unlock their massive savings deposits and pour into consumption and investing. In the mean time, thanks to the devaluation of Yen, there is a strong foreign investment into Japan to take advantage of a well educated workforce, which is now more competitive thanks to the lower salaries in Yen.
Inflation came down since the start of 2024, along with the interest rates, inspiring a flurry of booms in stocks markets around the world. However, the high inflation years of 2022 and 2023 cause a lot of unhappiness on the streets and this lead to a fall in many incumbent governments in developed nations.
The greatest impact from the sea of political change comes from the resounding victory by the Trump lead Republican party in a sweeping win that gave them total control of the government in the coming term. The US equity market reacted in excitement as Trump is believed to be friendly towards corporations and is pro economy.
The last major story of 2024 is the seemingly revival of the Chinese stock market, thanks to strong government intervention in hopes of injecting confidence into China's economy in the midst of rising unemployment, falling property prices and a falling inward flow of investments.
Investment Outlook and Themes for 2025
The Trump Effect
Trump will take office on January 20th, with a campaign pledge to impose a 60% tariff on China and a 5-10% tariff on nearly every other country with a trade deficit with the United States. Exceptions include a few countries such as the Netherlands, Hong Kong, Brazil, Australia, the United Kingdom, and surprisingly, Singapore.
I predict that Trump is using these large tariff numbers as leverage to push other countries to purchase more U.S. goods and services and to encourage multinational corporations to establish factories and offices in the U.S. This move could benefit smaller U.S. companies by creating new supply chains to support these new setups. Additionally, Trump is likely to continue his efforts to get China to buy more agricultural products from U.S. farmers, appealing to his voter base, which heavily consists of rural populations.
Trump is known for using the stock market as a measure of his success. He will likely exert influence over various federal agencies, including the U.S. Federal Reserve, to maintain a buoyant stock market. The strong U.S. economy might reverse the declining inflation trend, fueled by tariffs and robust consumer and investor demand. This could disrupt the stock market if the Federal Reserve halts its plans to lower interest rates. However, a stronger economy could boost corporate profits, leading to a relatively positive stock market in 2025. Although returns might not match the past two years, I still expect a positive outcome for the U.S. market.
The European Problem
What benefits the U.S. might not be as positive for the rest of the world, particularly for the EU, China, and Japan, which have kept their currencies low against the U.S. dollar to boost exports. The EU, in particular, could be one of the main victims of rising global protectionism. European economies are still fragile, recovering from the energy shock caused by the Russia-Ukraine war, and have largely missed out on the benefits of the AI revolution.
Europe's traditional strength in high-tech manufacturing is under threat from a surge of cheap exports from China. The German car industry, for instance, is facing stiff competition from Chinese electric vehicles, leading to significant impacts. For the first time ever in history, Volkswagen has closed factories in Germany and laid off thousands of workers. The tariffs that Trump has threatened to impose on European countries will further weaken their competitiveness. However, the wave of political change in Europe could enable new governments to implement reforms and potentially reverse these negative trends.
Will China's Stagnation Continue?
China's economy is grappling with several challenges, including slowing growth, deflation, and a weakening currency. In response, the government has implemented short-term measures aimed at modestly boosting growth in 2025, though these are viewed as temporary fixes rather than addressing underlying issues. Key structural problems, such as overinvestment in manufacturing and the need to shift toward more consumer-driven growth, remain unresolved.
Additionally, prices are barely increasing, exacerbating economic difficulties. The yuan's depreciation against the dollar has made Chinese exports more competitive internationally but has also driven up the cost of imports, contributing to trade imbalances.
Household spending remains weak, despite efforts to encourage more buying of goods like cars and appliances using a consumer trade in program. Many people are focused on paying off debt rather than spending more, limiting growth in consumption.
One positive aspect has been China's export growth, which has significantly contributed to the economy. However, this heavy reliance on exports leaves China vulnerable to shifts in the global economy and trade policies. The Trump tariffs, in particular, could disrupt China's strategy to rely on exports to navigate its economic slowdown.
Opportunities Amid Threats of Protectionism
The Trump tariffs, primarily aimed at reducing the U.S. trade deficit and boosting domestic production, focused largely on imported goods, especially from China and other countries. These tariffs imposed extra taxes on various physical products like steel, aluminum, electronics, and consumer goods. However, they did not directly target imported services such as software, consulting, financial services, or digital products, as tariffs typically apply to tangible goods rather than services.
Countries with the highest trade deficits, such as China, Germany, Mexico, and Canada, were the main targets of these tariffs. While some corporations considered moving factories to Vietnam to avoid the tariffs, Vietnam, with its significant trade deficit with the U.S., could also become a target.
When analyzing the impact of tariffs on different countries, it's useful to categorize them into two groups. Countries that export a higher percentage of services than goods are likely to fare better during periods of trade protectionism. Besides the United States, this group includes the United Kingdom, India, Singapore, Ireland, and Switzerland, which offer robust financial and IT services. Focusing on countries less affected by the trade war could present promising investment opportunities.
Portfolio Investment Strategy for 2025
The word of the day for 2025: Cautiously optimistic.
I believe the U.S. economy will remain strong and continue to be a key driver of the global economy in 2025. However, the tech-driven stock market growth is likely to slow down as the initial excitement over new technologies gives way to the challenges of commercializing them and generating real profits. Tech companies that have surged on the AI wave but fail to present a clear path to profitability will face setbacks, and investors will become more discerning with their tech stock choices.
Given these dynamics, I might consider reallocating my tech-focused fund into a broader U.S. equity fund with a significant emphasis on technology stocks. This approach would help reduce risk as tech valuations become more expensive, while still allowing for some exposure to the potential growth from the AI revolution, which remains largely untapped.
I plan to further reduce my allocation to Emerging Markets and reallocate those funds to a broader portfolio with increased exposure to Europe and Japan. India will remain a part of the portfolio due to its service-oriented export economy, which is less impacted by the Trump tariffs. China will also stay on my radar as I believe the situation there is stabilizing. However, potential challenges from the Trump tariffs and the risk of prolonged economic stagnation may result in the Chinese stock market moving sideways rather than upward.
I will reduce the asset allocation from 80/20 to 70/30 in favor of equities. The fixed income portion will be repositioned to adapt to potential changes in the interest rate environment, which could fluctuate depending on whether Trump’s policies reignite inflation. I plan to reallocate fixed income investments into short-duration bonds, as they can better respond to interest rate shifts. Additionally, I may introduce high-yield U.S. or Asian bonds to capitalize on the strong global economy and the higher returns these riskier bonds offer.
Selecting countries and sectors will become more challenging in 2025 as the new Trump administration introduces greater unpredictability into the global landscape. However, this uncertainty will also create new opportunities for profit. By closely monitoring the market and maintaining a flexible asset allocation, we can better position ourselves to seize these emerging opportunities.
Welcome to 2025!
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