4 Investing Ideas for 2025: Morningstar

Keeping significant cash on the sidelines won’t generate much return longer term compared with most fixed income assets, but investors haven’t let their large cash hoards go post-pandemic, the firm says, noting longer-term government bonds, like 10-year Treasurys, seem to offer “an unusually high return” relative to cash.

Intermediate 5- and 7-year bonds offer an attractive risk-reward balance, Morningstar says.

Bonds issued by foreign governments may help clients diversify and gain attractive yields, the report says. Investors should look for securities with nominal yields higher than inflation and central banks’ inflation targets, it says, noting Brazil and Mexico offer attractive yields.

4. Companies Using AI

While AI investing this year has focused on hardware and infrastructure, benefiting Magnificent 7 companies like Nvidia, it’s likely to shift next year to businesses that can commercialize the technology’s use, says Morningstar. The firm suggests advisors look at companies being supplied by Nvidia, Amazon, Alphabet (Google) and Microsoft as potential sources of AI-influenced returns.

“We expect 2025 will be the year that capacity begins to catch up to demand and the next evolution of AI will begin. The next step will be for corporations to embed AI within their products and services to drive revenue growth,” it says.

“Those companies that drive revenue and/or expand operating margins will not only provide earnings growth today but either dig or widen their economic moats to bolster returns on invested capital for years to come,” the firm says.

To Watch: Private Assets

Clients considering private assets, which have been gaining prominence, need to understand that these investments bring lower liquidity, Morningstar suggests.

The firm notes that U.S. public and private markets have converged this year through new investing products, such as BlackRock and Partners Group’s model portfolio offering retail investors access to private equity, private credit and real assets — among other partnerships.

“While we applaud efforts to meet investor demand, the liquidity risks associated with bringing private assets to retail products, as well as the potential costs associated with this convergence, are two areas that will draw our focus in 2025 and beyond,” Morningstar says.

The public-private convergence “appears to be largely taking place through private credit rather than private equity,” the report says, noting that private equity is less liquid than private credit.

Competition among asset managers to lead in this area should drive fees lower and produce better products, but “bringing complex and less liquid assets to the mass market remains largely uncharted territory” in the U.S., the report says.

Conclusion

Whatever a new year may bring, Morningstar reminds advisors and clients to focus on the long term and not overreact to elections and other short-term geopolitical conditions. The key to success is investing in assets that meet the client’s specific needs, goals and circumstances, the report notes.

The best opportunities may be unpopular and discounted, potentially offering “unusually attractive prices for the patient investor,” the report says.

Once investors define their investing goals and time horizons, they can build portfolios to be resilient to various market scenarios, says Morningstar. “Investors benefit from the ability to adapt their portfolios to the market landscape because the risk/reward trade-offs best suited to meet investment goals vary across assets and through time.”

Credit: Chris Nicholls/ALM