2025: Patient and Positive
At Binary Capital 2024 was a very positive year for return generation. We delivered across many areas: investment returns, strong forward-thinking views and excellent risk management. Now to look forward.
Not all years are the same. We view 2025 with cautious optimism with our investment principles always at the centre of our thinking of what we do. In 2025 there is bound to be enhanced volatility, we will navigate this, especially around ‘growth’ theme volatility.
In my last note I talked about 2024 at length around our exceptional performance. It is now to look forward to 2025 with the same determination of focus we did last year and also previous years.
Investment markets have a period of relatively calm in 2024 around earnings, returns and data generally favourable albeit there were significant elements of volatility during the year.
January was a relatively bullish month with strong pockets of returns around growth sectors. There was talk of US ‘animal spirits’ being unleased upon the actual inauguration of President Trump and him assuming office.
A key inflexion point during the month was in the last week of January : a smallish Chinese technology entity revealed an interesting reasoning (R1) artificial intelligence chatbox, that seems to surpass many of the US AI models but importantly (probably) at a lower cost and better efficiency point – Deepseek. The classic ‘known unknown’ appearing and hence taking many people by surprise.
The ramifications of the Deepseek iteration once realised were profound – markets on 28Jan having a 3% to 5% sell-off in US equity markets – resetting markets somewhat, especially around the AI names that led the rally over the past two years or so. Nvidia and others led the sell-off. In the past few years AI themes have been the key driver of returns. So naturally uncertainty in that theme will jolt markets.
At Binary Capital we are trying to assess the ramifications of the Deepseek entry into the global AI ‘arms race’ and implications for future technology trends and spends. The negative reaction of some commentators and the overall market seems to be overdone. Looking at some facts: the US is going through a period of strong economic growth, irrespective of how you view Deepseek, US exceptionalism in technology is pretty much set and will be very difficult to manoeuvre away from and dislodge. The demand for Nvidia high value chips may be less than expected in the coming years, but still there will be considerable demand. It is pretty imperative the US wins this arms race for AI supremacy, and they will do whatever it takes to do so even via political means. This can only be positive for long-term US technology trends. A smallish Chinese technology company funded by a billionaire hedge fund manager is unlikely to change those dynamics.
There is also something called the Jevons Paradox – which essentially means that improvements in computing efficiency leads to proportional increases in demand for computing resources. Another similar analogy, is the gas law: making AI significantly cheaper will expand the market for it. This could mean more adoption of AI much more widely and faster, which can only be positive for overall technology demand, innovation and importantly US technology growth and earnings specifically. Something similar happened post the dot.com period.
The recent announcement of tariffs (less of a surprise albeit the timing was quicker than expected) by President Trump on countries with trade imbalances with the US, will only lead to a global ‘trade wars’ that could be beneficial to the US long-term but will be economically damaging (inflation and GDP growth) to the US and all in the short-term. Another factor that will create significant market volatility. I plan to write more about this.
Overall, time will tell. We will not make any knee-jerk reactions but look at the broader picture. Irrespective of the movement in the US market this year, at Binary Capital we are well positioned to take advantage of global trends with key principles around:
• Diversification
• A focus on international markets, especially the US but not overweight there.
• Three key themes we like: technology, healthcare and biotechnology.
• In many of our strategies we have strong market protection with a three-pillar approach towards asset allocation: fixed income, equities and liquid alternatives.
Such liquid alternatives help us to navigate well any downside pressure on equity markets as they act as a hedge or are minimally correlated to fixed-income and equity markets. For example: in our CORE strategies, returns in January were in the region of +1.7% to +4.7%, top decile returns relative to the peer group.
We are long-term investors, tending to see matters in years instead of weeks or months. It is an identifiable competitive advantage.
We stick to that strategy and reiterate that we see compelling reasons why the investment opportunities for growth and returns are just as relevant in 2025 as they have been in previous years.
Saftar Sarwar
Chief Investment Officer
Binary Capital
