Stocks in Translation: Top Areas to Watch in 2025

As we approach the end of 2024, investors are looking ahead to 2025, seeking opportunities to grow their portfolios. In this article, we'll highlight three key areas that Stocks in Translation guests suggest investors pay close attention to in the coming year. These areas offer attractive growth potential and dividend yields, aligning with various investment strategies.

1. Value Stocks: The Comeback Kid

Value stocks have been out of favor for much of the past decade, but recent trends suggest they may be poised for a comeback in 2025. The spread between value and growth stocks has been widening, with value stocks at a cyclical low compared to growth stocks. As the business cycle resets and the Federal Reserve begins its interest rate-cutting cycle, investors may seek safer stocks, driving capital towards value stocks.

Examples of value stocks include discounted value plays like PepsiCo Inc. (NASDAQ: PEP), Nike Inc. (NYSE: NKE), and ASML Holdings (NASDAQ: ASML). These companies offer attractive valuations, with low price-to-earnings (P/E) ratios, high dividend yields, or low price-to-book (P/B) ratios. For instance, PepsiCo has a P/E ratio of around 18.5, a dividend yield of 2.7%, and a P/B ratio of 7.5, which are relatively low compared to its peers and the broader market.

Investors can also consider tracking broader value ETFs like the iShares S&P 500 Value ETF (NYSEARCA: IVE) to find alpha in the stock market. This ETF offers exposure to a broad range of value stocks, providing diversification and potential upside as the value stock rally gains momentum.

1. Energy Stocks: Fueling Growth

The energy sector is expected to be a key driver of growth in 2025, as the economy picks back up on interest rate cuts, leading to increased oil demand. The relationships between growth and value stocks have always been mirror images of oil prices. As value underperforms growth, low oil prices accommodate easier and more flexible business environments. The opposite is true: as value starts to outperform, it is typically due to high oil prices that make large-cap stocks with economies of scale more attractive.

Examples of energy stocks include Occidental Petroleum Co. (NYSE: OXY) and Transocean Ltd. (NYSE: RIG). These companies offer attractive valuations and strong fundamentals. Occidental Petroleum, for instance, has a debt-to-equity ratio of around 0.5 and an ROA of 11.5%. Transocean Ltd., with a debt-to-equity ratio of around 0.3 and an ROA of 14.5%, is another example of a potentially undervalued energy stock.

Investors can consider tracking energy ETFs like the Energy Select Sector SPDR Fund (NYSEARCA: XLE) to gain exposure to the sector. This ETF offers diversification and potential upside as energy stocks take off again.

1. Chinese Stocks: The Dragon's Resurgence

Despite the challenges faced by the Chinese economy, it remains the world's second-largest economy, and investors should consider allocating a portion of their portfolio to Chinese stocks. A lower dollar index, which raises the price of any stock or commodity quoted in dollars, will directly favor Chinese stocks. This trend has historically been a catalyst for stocks like Alibaba and the broader China ETF.

Examples of Chinese stocks include Alibaba Group (NYSE: BABA) and the iShares MSCI China ETF (NASDAQ: MCHI). These companies offer attractive valuations and growth potential. Alibaba, for instance, has a P/E ratio of around 12, a dividend yield of 2.5%, and is well-positioned in the e-commerce and cloud computing sectors. The iShares MSCI China ETF has a P/E ratio of around 10.5 and a dividend yield of 2.25%, indicating potential undervaluation compared to other emerging markets and developed markets.

Investors should monitor geopolitical developments and assess potential opportunities and risks in the global economy, particularly in China. While there are risks associated with investing in China, such as geopolitical tensions and regulatory uncertainties, the potential for growth and dividend yields makes it an attractive area to watch in 2025.

In conclusion, investors should pay close attention to value stocks, energy stocks, and Chinese stocks in 2025. These areas offer attractive growth potential and dividend yields, aligning with various investment strategies. By considering these recommendations and staying informed about market trends and economic indicators, investors can position their portfolios for growth while managing risks effectively in the coming year.