The global economy is entering 2025 with decent momentum. Inflation is declining, thus enabling central banks to ease restrictive monetary policy. Historically, a U.S. economic soft landing and monetary policy easing have helped equities and fixed income to outperform cash (represented by U.S. short-term Treasuries). We believe this is still the most likely scenario.
However, the incoming Republican administration in the U.S. and the political changes in many developed economies suggest that significant policy shifts could impact the global economy and investment landscape in both the short and the long term. We highlight five factors covering the IFs and BUTs that investors could focus on.
- I: Inflation resurging
- F: Fiscal discipline
- B: Borders and geopolitics
- U: Unemployment and recessions
- T: Trade and industrial policy
What’s positive is that there are solutions to tackle these issues through allocation into equities, fixed income and alternative assets. In this 2025 Market Outlook, we aim to address some of the key topics and themes investors should consider.
Explore the outlook
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Can the U.S. economy maintain the soft landing?
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Central bank policy: In lockstep or dancing to different tunes?
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Exchange rates: What could stop the rising U.S. dollar?
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Is it time to take a fresh look at fixed income?
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Trump’s tariff plans: Accelerating an ongoing supply chain evolution
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Embracing Asia’s many opportunities despite the challenges
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Why the building of AI infrastructure is a boon
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What’s the view on U.S. and developed market equities?
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The importance of diversification amid portfolio construction
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Conclusion
Despite the Fed's slightly larger cut at the start of its monetary rate-cutting cycle in September, future policy decisions will be guided by evolving economic conditions, particularly in the labor market.
Interest rate differentials and other cyclical factors are likely to support a strong USD in the near term. However, as structural factors start to be priced in by markets and considering its current valuation, longer-term risks lean toward a gradual moderation of the USD.
While the steepening curve has created opportunities for positive carry on long U.S. duration, the expected increase in Treasuries supply and the Fed’s continued reduction of its Treasury holdings suggest that long-term yields could stay high for some time.
While any new trade laws would require congressional support, the President can impose tariffs for unfair trade practices or national security reasons. However, tariffs are often negotiation tools, and the actual levels may be lower or more limited than initially proposed due to their impact on U.S. inflation and growth.
If China’s economic momentum improves in 2025, we see value opportunities in Chinese equities, especially for private sector companies that have enhanced their profit margins and corporate fundamentals. Improved market sentiment toward China could also attract more capital flows back into Asian markets.
The capex boom is broadening the range of AI beneficiaries, presenting investors with diverse opportunities to invest in AI.
Conditions and fundamentals for positive developed market equities outperformance are still in place.
The challenge for asset allocators is to balance overweight positions in risk assets with effective diversifiers to hedge against both growth and inflation risks in the year ahead.
Our ongoing recommendation to stay diversified remains valid even in a promising year with various IFs and BUTs. Investors will also need to be nimble to adjust their portfolios to account for potential outcomes.
Image source: iStock.
Diversification does not guarantee investment returns and does not eliminate the risk of loss.
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