Hedge fund strategist flags biggest concern for markets in 2025 - and offers ideas for shelter

Dow Jones12-20 19:54

MW Hedge fund strategist flags biggest concern for markets in 2025 - and offers ideas for shelter

By Barbara Kollmeyer

Miners are one sector worth a look, says Man Group's Ed Cole

The Federal Reserve let the inflation-worry cat out of the bag this week.

And at the world's largest publicly traded hedge fund, Man Group, the threat of higher prices has been top of mind for Ed Cole, head of multi strategy, equities, and his clients, he told MarketWatch in a recent interview.

"Our biggest concern in 2025 is inflation reaccelerating. We think there's a reasonable probability of that happening, irrespective of whatever policy the next U.S. government implements, there is just enough evidence in leading indicators of inflation in various key areas like shelter in particular, that the inflationary forces back up again," Cole said.

"And obviously that would be pretty problematic for high multiple stocks, and could be quite hard for markets in general, bearing in mind that in inflationary periods, you typically don't get bailed out by your bond portfolio if your equity portfolio sells off as well," said the strategist.

He worries U.S. inflation could be "in the 3s" by mid-2025, tough for stocks with big multiples. "What we saw in 2022 is that high multiple stocks derate in inflationary environments, so that's where the real pain is. And stocks that have short-term cash flows, and where those cash flows can adapt to the inflationary environment, typically do much better."

Individual investors who are concerned should start building exposure to assets that benefit from inflation, such as copper, a core industrial metal that "benefits from environments where nominal GDP is rising."

He says copper miners can offer protection. Cole sees years of post-COVID destocking ending in 2025, with restocking supportive for manufactured goods. "Copper is obviously in everything, in all manufactured goods, but principally shows up a lot in electrification and clean tech. So it has huge structural tailwinds. We think it has some cyclical tailwinds," he adds.

The strategist also likes gold miners, noting the precious metal has been "well supported" by central-bank buying. Cole said amid rising interest rates, ETF flows "have been very negative." But that seems to have shifted, meaning "you probably have, coincidentally now, the two big, typical buyers of gold turned buyer at the same time," he said.

And Cole says China has been overlooked by markets, as he thinks the government will do more than expected to support the economy after a "material pivot" in late September. Plus potential for a U.S./China tariff deal should not be overlooked, as he says the latter holds some cards. "They signaled they may devalue their currency, which the U.S. would not want."

He also sees opportunity in technology stocks but prefers software over semiconductors, given the latter faces potential headwinds from trade wars. "The software sector as a whole, we like globally. We think 2025 is a year where we're going to see software spending increasing - it was pretty soft in 2024."

They like "household names," some of which are selling artificial intelligence add-ons to their software packages, he said. "These are the kind of companies that are sort of the first adopters of AI technology and finding ways to monetize that without them necessarily being killer apps."

Cole offers some final thoughts on what he sees as an all-in investor view on the U.S. right now.

The response to the U.S. election "has been for markets to assume that the U.S. will win at the expense of everywhere else in the world, which is generally what has played out in equity markets. It's not obvious to us that that's how 2025 will go," he said, noting that this comes at time when the U.S. premium to equities in the rest of the world, based on trailing data, looks to be the widest in the last 30 years.

The 2000s, Cole notes, marked a decade of "massive emerging markets dominance," with few doubting that dominance over developed markets would end. "And the decade that followed was absolutely horrendous for emerging markets."

Still, Cole said he's "also clear that these excesses can go on for a very, very long time, and it doesn't pay to bet hard against them just because things are expensive."

The markets

U.S. stock index futures (YM00) (ES00) are falling early Friday, with tech stocks set to bear the brunt, with traders bracing for trillions in options expirations.

   Key asset performance                                                 Last       5d      1m      YTD     1y 
   S&P 500                                                               5867.08    -3.04%  -1.37%  23.00%  23.60% 
   Nasdaq Composite                                                      19,372.77  -2.66%  2.11%   29.05%  29.46% 
   10-year Treasury                                                      4.554      15.80   14.30   67.31   65.72 
   Gold                                                                  2618.4     -1.78%  -3.67%  26.38%  26.83% 
   Oil                                                                   69.1       -2.80%  -2.94%  -3.13%  -5.97% 
   Data: MarketWatch. Treasury yields changed expressed in basis points 

The buzz

Nike shares $(NKE)$ are dropping, with investors looking past a sales and earnings beat to new CEO Elliott Hill's ambitious turnaround plan.

FedEx stock $(FDX)$ is up after announcing a freight-business spinoff.

Stock in Danish drugmaker Novo Nordisk (DK:NOVO.B) is down 19% on a disappointing update over its weight-loss injection, with shares of rival Eli Lilly $(LLY)$ rising.

Due at 8:30 a.m., the Fed's preferred inflation gauge, the PCE price index, is expected to rise modestly.

A shutdown of parts of the government could begin after midnight on Friday, after the House rejected President-elect Donald Trump's new plan. Here's what it means for TSA, IPOs and Social Security.

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The chart

The above chart from Jonathan Krinsky, chief market technician at BTIG, shows materials, measured by the Materials Select Sector SPDR ETF XLB, as 2024's worst-performing sector, down 1.4% year to date. It's also the most oversold - XLB's relative strength index, a gauge of price momentum, is the lowest since 2018, so ripe for a bounce, he says. He flags Sherwin-Williams $(SHW)$, Vulcan Materials $(VMC)$, LyondellBasell Industries $(LYB)$, Amcor $(AMCR)$ and Eastman Chemicals $(EMN)$ as possible beneficiaries.

Top tickers

These were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern:

   Ticker  Security name 
   TSLA    Tesla 
   NVDA    Nvidia 
   GME     GameStop 
   PLTR    Palantir Technologies 
   MSTR    MicroStrategy 
   TNXP    Tonix Pharmaceuticals 
   AMD     Advanced Micro Devices 
   AAPL    Apple 
   RGTI    Rigetti Computing 
   TSM     Taiwan Semiconductor Manufacturing 

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-Barbara Kollmeyer

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December 20, 2024 06:54 ET (11:54 GMT)

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