Equities make positive start to 2025 despite recent volatility

After a strong 2024, this year has started on a positive note with the MSCI World up about 2.6% and the S&P 500 up about 2.2% (both in USD). This has been led by healthcare (+7.1%) and financials (+6.3%), with the latter in particular benefitting from a strong start to Q4 earnings season. About 20% of the S&P 500 has reported to date with sales up 4% and earnings up 11% on average.

In recent days, there has been a lot of noise about a Chinese AI startup called DeepSeek, which has raised questions around the short-term demand for AI-related semiconductors. This has put pressure on share prices across the whole supply chain, with NVIDIA, Broadcom and others down sharply. We think this is likely overblown considering announcements of sharply higher capex from Meta and OpenAI, and continue to monitor for opportunities to take advantage of any irrational share price movements. In the longer-term, it is likely that lower cost of generative AI drives significantly higher usage, which would be positive for all these companies.

Analysts forecast solid returns for equities and two rate cuts are expected in the US
Looking ahead to the rest of 2025, the overall environment continues to be positive for equities. Analysts project around 10% return on average for the S&P 500, supported by good earnings growth (estimated at  10%) and Trump’s pro-business policies. There are anecdotal signs that economic activity is picking up in the US and of a return to deal-making, which would also support equities.

The market is currently expecting 2 cuts to interest rates in the US as inflation remains under control and the US economy remains strong. This would be positive for our bond holdings, which are currently yielding around 5%. We remain invested in investment grade bonds from good quality companies, as we do not think the increased yields on offer elsewhere compensate for the higher credit risk.

 There may be some volatility along the way driven by Trump’s policies and other macroeconomic factors but, overall, we anticipate a positive year for both equities and bonds.

VAR’s Portfolios
VAR continues to be slightly overweight equities, with a large focus on US equities. We see opportunities in both events and thematic ideas for equities. On the bonds side, we are holding high quality investment grade bonds and some government bonds to protect us from any volatility.

The exponential growth of generative AI remains one of the biggest themes in the market. We have exposure to this via the large US tech companies and also via some more idiosyncratic positions such as GE Healthcare and Accenture. GE Healthcare is using AI to automate imaging analysis, which will significantly improve patient outcomes. Meanwhile, Accenture is benefitting from its corporate clients scrambling to understand the implications of generative AI and how to incorporate it into their businesses. Accenture reported > $1bn of AI bookings in their most recent quarter.

On the Event side, we have been bullish on the growth story of AstraZeneca, a global pharmaceuticals company, and re-initiated a position following a pullback in the wake of a scandal in China. The shares trade at a 40% discount to the global pharma sector despite a strong growth pipeline, which may provide a catalyst for rerating.

In our core holdings, we recently initiated a position in HCA Healthcare, the largest for-profit hospital operator in the US. We have owned HCA several times in the past and shares sold off recently due to concerns that the Trump presidency will reduce subsidies currently available via the Affordable Care Act. We think this is an overreaction and used the opportunity to re-invest in this excellent business.

We also recently initiated a position in Verisign, which operates the registry for .com and .net domain names. This looks a bit like a toll road on the internet: if you want a .com domain name, Verisign collects the toll. We think this makes it a very robust business. As you might expect, Verisign’s financial performance is excellent: it has delivered mid-single-digit revenue growth over the last decade and makes 65%+ operating margins. Verisign’s stock has traded off recently due to noise around contract renewal and volume weakness, giving us an opportunity to buy at an attractive price.

We remain focused on identifying mispriced opportunities across our three investment buckets of thematic, event-based and value-focused ideas and are confident in the outlook for our portfolios.

Disclaimer:

This message is provided for information purposes and should not be construed as a solicitation or offer to buy or sell any securities or related financial instruments, nor does the information constitute advice or an expression of our view as to whether a particular financial product is appropriate for you. Please note that we do not provide any tax or legal advice and clients must seek their own tax advice independently.

VAR Capital is an independent financial services firm offering asset management, lending and family office services. It was founded by individuals with extensive experience from Banking, Asset Management and Family Offices. Based in Mayfair, London, VAR Capital Ltd is authorised and regulated by the Financial Conduct Authority (FCA).

Source: VAR Capital

Media Contact: Vikash Gupta, [email protected]