Some outside-the-box investment ideas for 2025

The year 2024 has been an event-filled one, to say the least. Despite turbulence across much of the world, equity investors have enjoyed a remarkable year.

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The S&P 500 Index is up about 25 per cent so far in 2024. Even the TSX is up nearly 18 per cent despite the Canadian economy having spent the past six quarters in a GDP per capita recession. The performance of our economy and our stock market proves the assertion that the market does not correlate as highly with the real economy as many observers believe.

What can we expect going into 2025? Optimism, at least with respect to stocks, seems high. Given their strong performance, there is an understandable feeling of FOMO (fear of missing out). Unfortunately, markets operate in real time and there is no pause or rewind button. If you were not invested in stocks in 2024, you already missed out.

Almost every investment firm and analyst shares their opinions publicly. These pieces are written by very bright people, but the future is unknowable, even for the brightest of us. Instead of offering the standard outlook, I thought it might be useful to offer some outside-the-box ideas.

Stocks performed well this year and have for years. I’m not forecasting a crash, but it remains a possibility. Two long-term valuation models that have proved useful over the years, especially at extremes, are the Buffett Indicator – which is a ratio of the market capitalization of the stock market to total GDP – and the Shiller P/E ratio. This ratio uses inflation-adjusted earnings over the past 10-year period to give a more accurate reflection of profits generated by companies.

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Neither are particularly useful as timing devices but they are extremely useful in identifying if markets are entering long periods of strong or weak returns. They have a habit of indicating their most reliable signals when they are on the opposite sides of consensus forecasts.

Right now, both indicators suggest a wildly overbought market. In fact, the only time these metrics have been this far away from their historic means was briefly in 2000, and we all remember the dot-com crash. We should also remember that despite a dramatic drop in stock prices, that recession was mild. The market has literally been cheaper more than 98 per cent of the time over the past 100 years. Therefore, it makes sense that investment ideas reflect the fact that the market is at high-risk valuations.

The world is at war and even the pacifists in European governments realize this. The West has also learned that, with respect to war, it only takes one to tango. We may love peace, but jihadists, Putin, Xi and others may not share our desire. Defence spending will increase dramatically.

The raw numbers are mind-boggling. Conservatively, global defence spending is expected to increase by US$500-billion to US$1-trillion annually in coming years, and probably more if things get bad.

As conflicts in the Middle East have shown, wars will be won by superior technology. An army reservist can wipe out hundreds of well-trained, highly motivated fighters by pressing a few keys on a laptop. The iShares U.S. Aerospace and Defence ETF ITA-A provides the opportunity to benefit from increased defence spending. The United States and Israel (who work together symbiotically) are the world leaders. Even in a market crash, defence spending will continue to grow. In fact, economic problems historically result in more tensions between countries.

Artificial intelligence is here to stay, and the hype, in my view, is understated. Many jobs requiring slightly above-average intelligence will be replaced by AI. If I was running an investment management firm, the opportunity to replace managers making $500,000 a year with AI would be too tempting to resist. It would make the company more profit, yield better results in most cases, and AI doesn’t show up drunk after blowing $500 on a client lunch.

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There are a few AI funds that can be purchased. Avoid picking individual stocks yourself. Buying a basket of them, or even using active management, would be appropriate because some of these stocks are wildly overvalued. First Trust NASDAQ AI and Robotics ETF ROBT-Q and iShares Robotics and AI Multisector ETF (IRBO-Q) are examples of ETFs in this space.

Long-term U.S. Treasuries should be entertained. Ten-year U.S. Treasuries provide a yield of about 1.25 percentage points above similar-term Canadian bonds. If a crash occurs, managers will flood into the long end of the curve to protect capital in a flight to quality trade and in anticipation of rate cuts. The U.S. dollar itself will provide a safe haven.

Some investors argue that the new Donald Trump administration and its tariff ambitions will lead to higher inflation and thus drive up long-term bond yields. While that would mean lower bond prices, I don’t buy the inflation argument – provided M2 money supply growth doesn’t get out of hand. Meanwhile, the selloff in bonds over the last few weeks suggests there’s good value to be had.

An expensive but prudent idea would be to buy out-of-the-money put options against U.S. equity markets. Out-of-the-money puts are cheaper than at-the-money or in-the-money puts. Put prices rise in value when the underlying asset falls in price. It is a form of disaster insurance. Like most insurance, it ends up costing money while providing no value most of the time, but when you need it, you really need it. Personally, when I go on my banking app and see that my insurance company withdrew its monthly premiums from my account, I don’t feel upset that I wasn’t in a car crash, or that my home didn’t burn to the ground that month.

Hopefully, 2025 will be another good year for investors, but some cautious strategies are always a good idea. As George Soros said: “Markets are in a constant state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected.” Love him or hate him, the old guy has a point.

Tom Czitron is a former portfolio manager with more than four decades of investment experience, particularly in fixed-income and asset-mix strategy. He is a former lead manager of Royal Bank of Canada’s main bond fund.