By Adriaan Pask
As we approach the end of 2024, investors find themselves at an interesting crossroads, navigating through a complex mix of optimism and uncertainty. The economic landscape, particularly in the United States, presents a paradox: while prevailing sentiment suggests strength, the fundamental data reveals significant vulnerabilities. Looking ahead to 2025, it is imperative to examine these nuances and consider investments beyond US borders.
Underlying cracks in US economy could impact economic outlook
The US economy’s narrative has been largely positive, with economic growth holding steady, inflation appearing manageable, and unemployment figures remaining low. On the surface, these metrics have painted an encouraging picture, reinforcing confidence among global investors. However, a closer examination of consumer debt, savings, and corporate vulnerabilities uncovers underlying cracks that could reshape the economic outlook.
One of the most pressing concerns lies in the escalating levels of consumer debt. Credit card debt in the US has surged to an unprecedented $1.5 trillion, marking a 50% increase since 2021. This sharp rise is coupled with significantly higher interest rates, driven by the Federal Reserve’s monetary tightening. At the same time, the US consumer savings rate has halved to around 4%, from a historical average of 8%. This all points to a higher reliance of credit to sustain spending – a strategy that is unsustainable in the long term.
The housing market is another area of concern. While the impact of rising interest rates on mortgages has been delayed due to the structure of fixed-rate agreements, the eventual repricing of these loans will likely place additional pressure on consumers. As homeowners refinance or purchase new properties, they will face significantly higher borrowing costs, potentially curbing discretionary spending and dampening broader economic activity.
It's important to remember the weight that consumer data carries in this context. Consumer spending comprises close to 70% of GDP, so if the US consumer is under pressure, it’s a factor that demands attention.
Corporate America is not immune to these challenges
Apart from pressures on US consumers, bankruptcy filings have doubled since 2022, rising from 12,000 to 24,000 per quarter. This trend is exacerbated by the impending maturity of 50% of corporate debt within the next three years, which will need to be refinanced at rates substantially higher than those seen two years ago. The combination of increased funding costs and tighter margins could lead to further financial distress within the corporate sector.
US fiscal challenges reminiscent of issues faced by emerging markets
On the governmental front, the US faces its own fiscal headwinds. Twin deficits, with debt-to-GDP ratios exceeding 100%, have become a structural challenge. Net interest payments on government debt now surpass $1 trillion annually, constraining the federal budget and limiting capacity for investment in critical areas. Social security, Medicare, and defence spending together consume a significant portion of revenues, leaving little room for flexibility. The US’s fiscal challenges are reminiscent of issues faced by emerging markets, where rising debt servicing costs crowd out essential investment.
The political landscape adds another layer of uncertainty
With Donald Trump returning to the White House in January 2025, investors are bracing for potential turbulence. Trump’s prior presidency was marked by an assertive approach to foreign policy, trade, and domestic economic reforms. This time around, we can expect intensified trade tensions, particularly with China, as the US seeks to reclaim economic dominance. While this could lead to volatility, it may also spur positive developments, such as increased stimulus efforts from China, which could benefit emerging markets. However, the potential for inflationary pressures stemming from protectionist policies and onshoring efforts cannot be ignored.
Recent market reactions also provide some clues about the future. Assets like Bitcoin and Tesla have seen notable gains, arguably driven by speculation rather than fundamentals. The biggest clues, however, will come from 2016 – a generally volatile time and a rather painful year from a reporting perspective.
Diversification remains key when markets are in flux
From an investment perspective, these dynamics highlight the importance of diversification. While the US remains a dominant player in the global economy, the risks associated with concentrated exposure to its markets are growing. For instance, valuations in the US have risen significantly since 2016, making them more susceptible to volatility in the face of economic or political shocks. Investing beyond US borders, in high-quality companies across other geographies, presents an opportunity to mitigate these risks while tapping into growth potential elsewhere.
Emerging markets, in particular, offer compelling opportunities despite their own challenges. China’s potential for increased stimulus, driven by the need to stabilise its economy amid rising tariffs and geopolitical pressure, could unlock growth across the region. By embracing a global perspective and maintaining a disciplined investment strategy, investors can weather the uncertainties ahead and position themselves for long-term success.
Adriaan Pask is the chief investment officer at PSG Wealth.
BUSINESS REPORT