Against the background of a resilient economic environment and major central banks embarking on an easing cycle in 2024, equity markets delivered strong results, while fixed income markets saw modest returns.
Lori Heinel, global chief investment officer at asset manager State Street Global Advisors, noted that 2024 was “no ordinary year”, with elections around the world, persistent inflation and market volatility all playing their part in building an uncertain macro-economic environment. “Despite these challenges, markets continued to be resilient,” she said.
As we enter 2025, Heinel noted that she remains “cautiously optimistic”, with expectations of a soft-landing in the US look- ing set to translate into reality. “While there are a range of uncertainties to contend with, investors may want to consider above target allocations to equities and should remain thoughtful about portfolio construction,” Heinel said.
State Street Global Advisors believes that the rate-cut cycle that started in 2024 will continue for a while longer, although the Trump-led Republican US election victory could result in a change to the narrative in the latter part of 2025.
Global geopolitical forces could also play their part in rupturing long-standing economic and financial ties.
Tactical opportunities
State Street also retains its favorable outlook for fixed income in 2025. It anticipates that slowing economic output and tame inflation will allow central banks to cut policy rates further, even though the pace and scale may be more uncertain with a Trump administration.
This uncertainty may offer investors tactical opportunities to build or expand their duration positioning through the easing cycle.
“While spreads across investment-grade credit and high-yield debt are near historic lows, we are optimistic about prospects for fixed income assets next year, and see a generally favourable environment for advanced economy sovereign debt,” said Jennifer Bender, global chief investment strategist at State Street. “Market sentiment swings and volatility could potentially create opportunities for investors to manage or extend duration.”
Within global equity markets, the resilient economic backdrop seems to provide support for earnings, particularly in the US. Outside the US, the picture is more nuanced but there are pockets of opportunities across markets.
Investors, Bender said, will need to navigate short-term uncertainties as well as demographic changes, geo-economic fragmentation and the rise of transformative technologies.
“We expect Japanese equities to move sideways due to potential volatility, while Chinese equities may struggle in sustaining higher growth and strong performance despite the short-term relief from the country’s stimulus program,” Bender said.
“At the same time, we believe US large-cap equity will maintain its structural advantage to the rest of developed markets and see the outlook for emerging markets as more nuanced as investors balance economic and earnings growth and easing inflationary pressures versus geopolitical risk and a strong US dollar,” she added.
Constructive conditions
Moderating inflation, lower interest rates and robust underlying growth in major developed markets have contributed to a favourable outlook for asset prices, said Ben Way, group head of Macquarie Asset Management.
“While conditions are constructive, we maintain our longer-term view that we have transitioned to a ‘new normal’ where neutral rates are likely to remain elevated relative to the past decade,” he said. “The key risk to our 2025 outlook is more stubborn inflation, particularly if we see an escalation in trade conflicts between countries.”
Way also noted that against this more positive macro-economic backdrop, external shocks including geopolitical developments and extreme weather events, are driving short-term volatility in the markets, which will continue to present opportunities for public market investors.
“Private markets will be beneficiaries of lower rates in 2025 as the bid-ask spread narrows, potentially signalling an active year for transactions, following two years of historically weak activity,” he said. “Private equity and infrastructure funds are sitting on more than $5trn (£3.9trn)of un-realised assets globally, of which a significant portion was invested through pre-Covid-19 vintages.”
Way also said he had conviction in the energy transition, digitalisation and the ongoing need for investment in essential infrastructure. “We also believe that full electrification and modernisation of commercial real estate and housing has a key role to play in the de-carbonisation of economies,” he said.
There can be no doubt that the past 12 months witnessed a step change in interest in generative artificial intelligence.
“Generative AI represents a material increase in demand for server capacity globally, which we see first-hand through demand for data center capacity across our portfolios,” Way said. “This rapid rise in demand for data has significant implications for power grids and renewable power, driving convergence between three of our key investment themes.”
In addition, heightened geopolitical risk supports the case for geographic diversity beyond traditional core markets.
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