Outlook 2025: Highlights and investment implications
- 04 December 2024 (5 min read)
Two major uncertainties lie at the heart of the global economic and investment outlook - to what extent will US President-elect Donald Trump translate campaign promises into policy and how successful will China be in reigniting its economy?
Our view is Trump will not fully deliver what he suggested on tariff increases, migrant deportations and lower taxes. However, we anticipate he will do enough on these fronts to materially impact US growth as these policies bite into 2026.
Regarding China, our assumption is of ongoing support, sufficient to deliver a managed deceleration in growth over the coming two years. But these assumptions for the world’s two largest economies will govern the dynamics of the rest of the world. Overall, we expect global growth will remain at 3.2% in 2025 but then ease to 2.9% in 2026.
Core investment implications
Trump’s radical policy agenda has fuelled some financial market uncertainty, in terms of future investment returns.
Nevertheless, we believe the central macroeconomic outlook remains favourable for both bonds and equities. Ultimately, growth, stable inflation and lower interest rates should support markets.
But investment decisions need to consider cashflow resilience and valuations, given policy risks and broader concerns.
For now, we don’t expect a recession in 2025 which should help deliver positive equity returns, while credit markets should provide attractive income opportunities.
Central scenario: US policy agenda should be positive for equities
Our view: The underlying macroeconomic backdrop and potential policy mix in the US looks supportive for equities. Trump’s agenda creates a potentially positive growth impetus. Lower corporate taxes and deregulation should also support equity markets.
Earnings momentum will be a key driver and we expect US equities to continue to lead the way, with potential upside coming from thematic sectors like automation, while continued strong investment in technology and artificial intelligence (AI) should also be a key contributor. Outside the US, the outlook is more mixed. Emerging market equities would struggle amid tariff wars and a stronger dollar, and while Europe’s growth and equities earnings outlook is more subdued than the US, it offers more compelling valuations.
Implementation Idea
Rationale: We expect earnings growth in the US will continue to be driven by the technology sector with there being no evidence of any softening in demand for AI-related technologies. In 2024, close to half the growth in the entire market’s earnings per share came from the US’s information technology and communications sectors. |
Central scenario: Lower interest rates are good for fixed income
Our view: The likely path of interest rates should support decent yield in fixed income markets, with credit continuing to potentially deliver attractive income opportunities.
Prevailing yield levels in developed bond markets provide the basis for robust income returns, which should remain above inflation. On the credit side the additional return and the continued healthy state of corporate balance sheets underpin the attractiveness of both investment grade and high yield bonds. Valuations are a concern, and of course, investor sentiment towards credit will be subject to the uncertain evolution of policy and geopolitical risks but on a risk-adjusted return basis, credit is attractive.
Implementation Idea
Rationale: European fixed income investors may see total returns boosted by some decline in bond yields. Additionally, the relative picture should continue to support a strong dollar. For non-dollar investors, on a currency hedged basis, European fixed income looks more attractive especially as we continue to see opportunities in the credit markets. |
Central scenario: Risks have increased, short duration strategies remain attractive
Our view: There are numerous risks to consider - the uncertain evolution of policy and geopolitical tensions, as well as the government debt profile of many countries. More cautious investors could consider short-duration credit-focused strategies which are providing a potentially attractive risk-adjusted expected return.
The additional return and the continued healthy state of corporate balance sheets underpin the attractiveness of both investment grade and high yield bonds. This is especially the case for short-duration strategies. We continue to see US high yield, a short-duration asset class, potentially delivering healthy returns.
Implementation Idea
Rationale: Cash returns will ease further as interest rate cuts continue. But income should remain the focus in bond markets and compounding returns from short-duration exposure in credit and high yield remains a favoured strategy. |
Continued pursuit of net zero ambitions
Investment in the green transition will remain a major theme globally - even in the US, despite the Trump administration’s expected preference for oil and gas production over subsidies for renewable energy.
Joe Biden's Inflation Reduction Act (IRA) has driven $493bn in clean technology investment in the two years following the IRA’s introduction, so even if some companies backtrack some of those investments in response to the new political climate, many clean manufacturing investments already have steel in the ground. 1 Forecasts of significant increases in electricity consumption – driven by the technology sector and China’s power demand – will promote further integration of solar and wind energy assets into power networks. As such, sustainably-focused investment approaches will continue to benefit from a wide and growing opportunity set.
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Three key net zero investment opportunitiesby Jane Wadia, Head of Sustainability, Core Products & Clients Investors targeting net zero objectives can consider two broad ways to do this – across both equities and fixed income. One is around decarbonisation, which focuses on seeking opportunities associated with the transition to a low-carbon economy and reducing exposure to carbon emissions. In essence this means investing in companies committed to delivering robust transition plans. The other is actively looking to channel capital towards climate and biodiversity solutions investments which are helping to drive positive impact on the environment. Below, we explore the specific opportunities investors are favouring as we enter 2025. Carbon transition strategiesCarbon transition strategies are becoming an increasingly popular way to support a decarbonisation pathway and drive a shift in investor portfolios. They allow investors to move from commitment and high-level target setting to concrete action within an investment portfolio to support the transition to a lower carbon economy. This is a trend we’re seeing across both fixed income and equities. In addition, we are seeing increased appetite for Paris-Aligned Benchmark exchange-traded funds, which offer building blocks to decarbonisation-focused investors seeking access to key markets in a simple and efficient way. Green bondsGreen bonds have existed for many years and issuance continues to grow. Investors are truly waking up to the diversity of sectors that issue green bonds today compared to a few years ago. What is truly compelling is that we’re seeing more and more clients investing in green bonds as part of their global aggregate allocation, rather than just for sustainability-focused portfolios. This trend has been enabled by the expansion of the green bond market and is something we expect to continue in the years ahead. BiodiversityBiodiversity is an emerging but fast-growing investment opportunity. While biodiversity is arguably more complex than climate change, the good news is there are ways to incorporate it into listed and private markets investments. In particular, we are seeing increased appetite for concrete investment solutions such as dedicated biodiversity equity strategies which aim to identify the leaders of the biodiversity transition. |
Our summary outlooks for key countries and regions in 2025
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