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Investment Perspectives 2025 Outlook: No time for complacency
15 min read 16 Dec 24
Investment Perspectives
CIO Perspective: Positioning for resilience in fixed income
David Knee
Deputy CIO, Fixed Income
Interest rates are on the descent
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.
Caution required for bonds
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.
CIO Perspective: Broadening markets offer a wider opportunity set
Fabiana Fedeli
CIO Equities, Multi Asset and Sustainability
The impact of Trump
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 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, although the latter is 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.
The prospect of 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 – but these impacts would take time to come through and, to date, the Fed has relied on historic data to inform decision-making on interest rates.
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.
Selective opportunities in Europe and Asia
Robust growth and Trump policy expectations could see the US equity market continue to outperform in 2025, but not all stocks have the ability to perform equally well. Fabiana expects further broadening of returns across the market in areas that, until now, have remained in the shadows. She also 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 higher US tariffs and China’s domestic economy, is creating interesting stockpicking opportunities for bottom-up investors.
As investors prepare to navigate the year ahead, Fabiana believes the key focus in 2025 should be on finding the areas of the market that can offer the best performance, rather than trying to forecast overall index returns – following a strategy based on stock selection rather than one driven by top-down exposure to countries or sectors.
CIO Perspective: Private market growth trends set to continue
Emmanuel Deblanc
CIO, Private Markets
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.
No time for complacency
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.