As the old year draws to a close, the main participants in the All-Country World Equity Index remain much as they were a year ago, though at much enhanced share price levels. This index has delivered a return of more than 30% over a year. Eight of the top nine companies in the Index are US. All the top companies are in technology areas, with Taiwan Semiconductor Manufacturing Co (TSMC) the only non-US company that makes the list. TSMC is plugged into the US digital revolution as a crucial supplier, now extending its investment into the USA.
The US is 64% of the total value, with Japan at 5% and the UK and China at just 3% each. The technology sector dominates at 25%, with the two leading stocks in the Consumer Discretionary sector (11% of the index) also being technology giants.
The ‘Magnificent Seven’ leading technology stocks saw Tesla dip on fears of falling margins and sales difficulties for battery cars, only to recover later. Apple had a quiet period before it demonstrated its ability to evolve its products to participate in the new artificial intelligence (AI) waves. By May, Apple shares had plunged, but the shares price is ending the year around a third up. Tesla was also down at the half-year stage but surged to gains of 75% by December.
The sector weightings in the All-Country World Equity Index (rounded) can be found below:
What next for the world equity index?
Most of the arguments we made to be positive about shares for 2024 still apply to 2025. Interest rates in the US, Europe, UK and China are coming down, but still have more reductions to come. Monetary policy is more likely to ease further. Whilst governments on both sides of the Atlantic are facing budget pressures, the advanced countries can still raise borrowings and are not urgently trying to cut their deficits or reduce spending. Most want to help lead an expansion of infrastructure and energy investment.
The main countries have brought inflation under better control, with the Euro-area now needing stimulus to offset low or no growth. The US is stronger economically and has just elected a president who wants to accelerate the growth rate from around 2.5% to 3% - and who will cut taxes to help do this.
The world cannot get enough technology. Businesses are busily adding to their software and hardware to include AI in their business models and to enhance their digital delivery of services. Consumers want to do more on their mobile phones, are downloading more entertainment, doing more shopping online and reaching for apps to carry out many of their activities from booking a restaurant to hailing a taxi or locating a holiday. This all points to continued revenue growth for the leading players pushing this revolution.
There remains some inflationary headwinds and some realisation that interest rates cannot return to the low levels of the pandemic period
There are, however, two important differences between the end of 2023 and the final days of 2024. Equity markets are a lot higher, anticipating more of the good news that became more apparent as 2024 unfolded. China has now relaxed policy quite a lot, and the US, UK and Europe have started to cut interest rates, which gave markets a boost.
There remains some inflationary headwinds and some realisation that interest rates cannot return to the low levels of the pandemic period, driven there by extensive central-bank buying in the West. This argues for equities offering considerably lower returns next year than this, on the grounds that markets often find it better to travel than to arrive at a better destination. There should be enough policy support to avoid a new recession or monetary tightening, allowing some further positive returns to be earned.
What could go wrong next year?
As always there are risks that could change the otherwise benign background. Whilst the upcoming Trump administration has pledged to speed-up growth and lower taxes, it is also keen on higher tariffs. These are part a tax on the exporting company and country, and part a tax on US consumers where exporters to the US can pass on some or all the tariff in higher prices.
Whilst some of the tariff threats are bargaining positions seeking to force policy change in the counterparties, there is also a thought in Trump economics that a general tariff against the world could be good for US jobs and would bring extra revenue into the US Treasury. The tariff policy needs watching, as large tariffs that triggered substantial tariff retaliation would be bad for world growth, put up prices and help unsettle markets.
President Trump returns to the Oval Office wishing to be the peacemaker. Dramatic events in Syria are reshaping a troubled Middle East. Ukraine has now shifted to saying they will look at ceasefire proposals if Russia will engage. Whilst this means things could get better in both regions, there is also the danger of miscarriage. President Putin might not compromise sufficiently - and the Ukraine war could intensify. The new government in Syria could fail to unite the country leading to civil war – or could assert fundamentalist Islamist laws, adding to Israel’s concerns.
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