Long equity strategies favoured again in 2025?

Equities remain a highly favoured strategy in 2025, with nearly three-quarters of respondents (71%) choosing equities this year, according to IG Prime’s survey of hedge fund clients for our annual State of the Hedge Fund Industry report. Moreover, 27% of respondents favoured a pure long equity strategy, a further 31% favoured long/short equities and 31% favoured multi-strategy, including long equity positions.

Yet the bias towards long equities follows two years of strong returns for the strategy. The MSCI AC World index delivered a total return of 19.6% in 2024, outpacing government bonds, corporate bonds, cash and commodities.¹ Excitement about the potential of artificial intelligence, falling inflation and the prospect of interest-rate cuts, as well as the election of Donald Trump as US president and China’s economic stimulus, were among the factors behind the optimism. That followed a 20% return in 2023, as falling inflation spurred hopes of interest-rate cuts on both sides of the Atlantic, ²

So, given this strong performance and warnings that some areas of the US stock market, in particular, are ‘priced for perfection’, why do investors remain so positive towards long equities? ³

Firstly, the current environment continues to be very supportive of stocks, driven by positive trends in momentum, earnings and the economy, while equity markets have been relatively stable, according to asset managers such as Columbia Threadneedle.

It adds that while ‘historically on a price-to-earnings basis equity valuations continue to appear stretched, especially in the US … we think these valuations are reasonable when you consider that they are being driven by healthy earnings’.

Columbia Threadneedle also believes that investors should be ‘encouraged by the fact that this earnings strength is coming from a broader-based group of sectors and companies compared with the past few years – moving beyond the narrow scope of the “Magnificent Seven” (Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, Tesla)’. ⁴

Some analysts, such as Morningstar, also point out that while the overall US market is starting to look ‘pretty fully, if not overvalued’, certain areas of the US market, such as value stocks, ‘are still trading pretty close to fair value’. ⁵

Emerging markets the sweet spot?

Emerging market equities were favoured by 24% of respondents to the survey featured in our annual State of the Hedge Fund Industry report. There are a number of reasons why 2025 could prove positive for emerging markets. Critically, they are very attractively valued relative to developed markets after a decade or more of underperformance. ⁶ RBC says that emerging markets trade at a 50% discount to developed markets, in terms of price-to-book value, ‘the largest ever discount’.

RBC also points out that emerging market currencies have outperformed since the US Federal Reserve started cutting interest rates, and many emerging market countries have healthy fiscal and trade balances. ⁷

Emerging markets also have far superior growth outlooks than their advanced counterparts. The IMF’s latest World Economic Outlook, published in January 2025, projects growth of 1.9% and 1.8% in the advanced economies in 2025 and 2026, while the respective figures for emerging market and developing economies are 4.2% and 4.3%. ⁸

Word of warning

Emerging markets and global equities do, of course, face some challenges. These include Trump’s threatened tariffs on the likes of Mexico and China. RBC, however, argues that the US fiscal situation, which is ‘characterized by a large fiscal deficit and high debt, could block significant reforms’.

Trump has also mollified his tariff threats since taking office, saying, for example, that he thought he could reach a trade deal with China. In addition, Trump did not immediately impose tariffs as he had promised during his election campaign. ⁹

Less encouragingly, much of the optimism surrounding emerging markets has been predicated on a weak US dollar. Emerging markets are traditionally a beneficiary of a softening greenback since, among other positives, it reduces the costs of servicing US-dollar-denominated debt. But there are concerns that reflationary policies such as tax cuts could cause the Federal Reserve to adopt a ‘higher for longer stance’ on interest rates that would support the dollar.

Meanwhile, Goldman Sachs has warned that global stocks in general are vulnerable to a correction due to soaring valuations over the past two years, particularly in the US. Peter Oppenheimer, chief global equity strategist and head of Macro Research in Europe, explains:

‘While we expect equity markets to make further progress over the year as a whole — largely driven by earnings — they are increasingly vulnerable to a correction driven either by further rises in bond yields and/or disappointments on growth in economic data or earnings.’ ¹⁰

Nonetheless, according to the results of our survey, it looks like many investors are willing to bet that equities can outperform once again in 2025.

Sources

¹ https://www.trustnet.com/news/13434362/the-charts-showing-what-happened-to-global-stocks-in-each-quarter-of-2024.
² https://www.theguardian.com/business/2023/dec/31/smiles-all-round-as-financial-markets-end-2023-on-an-unexpected-high
³ https://www.morningstar.com/markets/are-us-stocks-priced-perfection
⁴ https://www.columbiathreadneedle.com/en/gb/institutional/insights/2025-equity-outlook-will-lower-rates-and-strong-earnings-be-enough-to-keep-markets-up/
⁵ https://www.morningstar.com/markets/are-us-stocks-priced-perfection
⁶ https://www.alliancebernstein.com/corporate/en/insights/investment-insights/rethinking-three-misconceptions-about-emerging-market-equities.html
⁷ https://www.rbcgam.com/documents/en/articles/emerging-markets-outlook-new-year-2025.pdf
⁸ https://www.imf.org/en/Publications/WEO/Issues/2025/01/17/world-economic-outlook-update-january-2025
⁹ https://www.reuters.com/world/us/trump-says-he-could-reach-trade-deal-with-china-calls-talk-with-xi-friendly-2025-01-24/
¹⁰ https://www.goldmansachs.com/insights/articles/global-stocks-are-vulnerable-in-2025