Overview
There is an inevitable divergence, J William Fulbright noted at the height of the Cold War, between the world as it is, and the world as man perceives it. For a long time over the past couple of decades, most of us at least agreed on the direction of travel. That is no longer the case. But the resulting divergence in policies, economic performance, and geopolitics present a strong range of opportunities for market participants in 2025.
Most prosaically, growth, inflation and interest rates across the world’s biggest economies are liable to head in very different directions in the months ahead and there is far more doubt about those paths. As our macro team lay out in their outlook, authorities in the United States, China, and Europe are liable to have very different concerns over the course of the year.
A landmark US election result raises the odds of an outright reflation of the world’s biggest economy. We are mid to late cycle, and not end of cycle, creating a volatile environment that should generally be good for risk assets but puts a premium on getting investment choices right. Valuations of a number of past winners are elevated, but the mood in general is positive.
As companies and consumers find their way through the new landscape, on equities we conclude that reflation will boost earnings, easing fears over higher corporate valuations. A pro- business, pro-innovation administration should prove helpful and lower interest rates should benefit capital-intensive industries and help cyclicals outperform. Optimism prevails in Japan and India.
Our multi-asset team run through some of their top picks, recommending we look beyond the previous stars to patches of the market that have been more neglected in the enthusiasm for AI and tech. They highlight US mid-caps, for thematic investors future financials, for income investors non-US duration, CLOs, and short dated high-yielding credit, and for drawdown-aware investors the value of absolute return strategies.
Fixed income investors meanwhile face tight spreads that are priced for benign economic conditions. With public sector deficits projected to expand, the prospect of tariffs and trade disputes, and ongoing geopolitical tension, there is a case that less optimistic scenarios are being underpriced. This represents a potential source of value in credit markets.
We worry in general about the lack of a clear path to slow the growth of public debt over the course of the next four years. Stagflation may yet still be a threat. Politics likewise hang over a profoundly complex picture for currency markets. Donald Trump has said he would like a weaker dollar, but the market reading of his policy platform is it will do the opposite. We will see if that holds.
What China does on stimulus - and with its stock of US Treasuries - looms large. A stabilising Chinese economy is welcome news for Europe, but it will not lend enough strength to the continent to fully recover in the next 12 months, while the dollar is a crucial factor for emerging markets.
The need for a diversified portfolio to spread risk also makes the case for private assets. Going into 2025, with many markets still on the cusp of recovery, prices are low and there are opportunities for investment that could deliver solid returns in the medium to long-term.
In short, investors will need a flexible approach. Detailed, deep research into the businesses and markets they invest in will be at a premium. Divergence, as Fulbright said, is inevitable - and this year it will pay to watch the differences.
