As we look into 2025, what trends are likely to influence financial markets – and where should investors look for potential opportunities in the coming months?
Inflation and interest rates have been critical issues for investors in the past few years. This has put central banks, and the US Federal Reserve (Fed), in particular, in the spotlight. Entering 2025, major central banks are in the process of reversing their recent aggressive interest rate hikes. Investors have had to wait longer for this process to begin than they imagined. The Fed, for instance, kept rates on hold for 18 months before finally cutting in September 2024.
For David Knee, Deputy CIO Fixed Income, the Fed’s higher for longer stance challenged accepted economic theory. He observes that despite the 5% rise in US interest rates and elsewhere, advanced economies have displayed remarkable resilience. Instead of triggering a recession, however, there appears to be a widely held view among investors that policymakers have delivered an economic “soft landing”: bringing down inflation without causing a major economic slowdown.
Looking ahead, even though the global rate-cutting cycle is now underway, there is uncertainty about the scale and pace of further cuts. Central banks are “descending from the peak” carefully and cautiously, particularly in the US where the economy remains resilient. Moving forward, we may see interest rates come down at different speeds in different regions as economic conditions vary.
The one notable exception to this downward trend is the Bank of Japan, which seems set to raise rates in the coming year as Japan continues to emerge from decades of deflation.
What does the normalisation of interest rates mean for global bond investors? According to David Knee, absolute yields are still attractive on both very short-dated bonds and those with longer maturities as they offer some protection against any potential increase in inflation.
Moreover, he suggests bonds with longer maturities offer a potential counterbalance to equity exposure if the macroeconomic story deteriorates and stockmarkets fall.
The case for corporate bonds is nuanced. Credit spreads – the amount of compensation investors expect above the return from a risk-free asset such as government bonds – are low and investors are not being well compensated for longer-term corporate risks, either in investment grade or riskier high yield debt. On the other hand, absolute yields look close to long-term averages.
David’s assessment is that bond investors require caution for 2025 and it could be beneficial for portfolios to be defensively positioned.
If speculation about central bank policy fades in 2025, a new major source of potential uncertainty for financial markets could be Donald Trump. Since his election victory in November 2024, the potential impact of his ‘America First’ policies such as tariffs and immigration curbs has dominated market commentary and headlines.
As we move into 2025, Fabiana Fedeli, CIO Equities, Multi Asset and Sustainability, suggests the Trump trade – investing in stocks that might benefit from the his policies – is likely to remain the focus of many investors. In her view, expectations of less regulation and lower taxes are positive for the immediate US macroeconomic picture but not for the longer-term fiscal picture. A major concern among some investors is that Trump’s policies may accelerate the US’s growing deficit.
High import tariffs would have a negative effect on the US economy, in particular, on inflation by making imported goods more expensive. Any inflationary impact from Trump’s policies could change the trajectory of the Fed’s decision making.
There is plenty of debate about how Trump’s second administration will pan out but, in reality, only time will tell how many of the proposed policies will be implemented – and to what extent.
While robust growth and Trump policy expectations could see the US equity market outperform again in 2025, Fabiana believes there are compelling bottom-up stock-specific opportunities in other markets, such as Europe and Asia.
In Europe, she points to opportunities in more economically-sensitive areas such as chemicals and materials. Banks are another potentially interesting area. Investor caution towards Chinese equities, due to concerns about the risk of US tariffs and China’s domestic economy, is creating interesting stockpicking opportunities for bottom-up investors.
As investors navigate the impact of Trump’s policies, elevated valuations and the broadening of returns beyond the technology sector, the key issue for 2025 will be finding the areas that could offer the best returns and selection will be essential in generating superior portfolio returns.
Investor interest in private markets, or alternatives, has been growing in recent years and Emmanuel Deblanc, CIO Private Markets, believes this trend look set to continue in 2025. Institutional investors are progressively allocating away from public markets towards private assets. Meanwhile, new vehicles are being introduced to allow non-institutional investors to gain access to the asset class, opening up private market investments to a wider investor base.
Emmanuel is optimistic in that the opening up of the Initial Public Offering (IPO) market could be positive for private equity investing, as it would provide the means for investors to exit their investments.
With historically high real (inflation adjusted) yields, Emmanuel also sees a positive outlook for private credit. The asset class has been resilient across market cycles and he expects this trend to continue. Despite some headwinds, the real estate sector is in recovery mode and offers opportunities for investors in 2025.
The return of Donald Trump to the White House and the potential for disruption to the global economy arguably represents a meaningful source of uncertainty. With central banks on a gradual path to lower rates and lingering worries about a possible recession, we believe now is not the time for complacency. In an increasingly unpredictable world, we believe an active, selective approach will help investors identify promising long-term opportunities across all the different asset classes in the year ahead.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Wherever mentioned, past performance is not a guide to future performance.
The views expressed in this document should not be taken as a recommendation, advice or forecast and they should not be considered as a recommendation to purchase or sell any particular security.
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