What could go right in 2025?

M&G Wealth’s Portfolio Manager, Alastair Clark, looks at some of the things that could go right in 2025.

The adage of ‘time in the market’ over ‘timing the market’ certainly applied last year. Investors were concerned about global recession, inflation, the UK and US elections, as well as wars and rising tensions between countries. Despite all of this, the markets were in a strong position in December, which shows the importance of considering the positive scenarios alongside risks. Here are just some of the events that could go right for markets in 2025.

Our view is that not all of these things will happen, however we’d be surprised if the future is all risk with no reward.

AI adoption

The demand for Nvidia’s ‘Hopper’ chips – used in data centres to power the first wave of the Artificial Intelligence (AI) market – continues to be strong. The rollout is real but what has been limited until now are the amount of companies using the technology to improve their processes. This is now increasing. Many large companies are investing more in AI over the next year. Also, a lot of people are now using AI for their work. 2025 could be the year businesses start to rollout AI technology more widely. For example, in drug development, the first AI developed drugs will likely go through stage-three clinical trials this year.

Peace talks with Vladimir Putin

US President Donald Trump has said he will end the war in Ukraine in a day. The shape of the deal achieved will be a test of his foreign policy. The worry is Trump will impose a bad deal on Ukraine and yield to Putin’s current demands. This could embolden Russia and push current US allies closer to China’s sphere of influence if they lose confidence in the US. Trump’s international focus seems to be directly on China which would be one reason why he’d want to get a ceasefire that favours Ukraine and pushes back Putin’s demands. In this scenario we think European stocks would do well. Having Russia return to selling energy freely in international markets could lower gas and oil prices. Western governments would also welcome removing the cost of funding Ukraine’s war effort.

China could do more stimulus

China faces economic challenges. Property prices are falling, households aren’t spending and banks don’t want to lend. For fear of missing their 5% GDP growth target, China has initiated some stimulative policy measures that focus on local debt restructuring to free up funds for investment in services and infrastructure as well as promoting banks to lend. It’s not targeting quick results though, and quick results are what the market wants.

If the trade war is as extensive as Trump has threatened with 60% tariffs on all Chinese goods, we think Beijing will take measures to encourage consumption. The next step would be for China to transfer funds directly to households. The current package leaves the door open to more spending if the economic malaise worsens.

An industrial strategy for Europe

We’re seeing a pullback of unchecked free trade and a more multi-polar world which has led countries to prioritise their own strategic industries. This is led by the US with big spending packages for domestic industries. In Europe there aren’t many new companies rising up to disrupt existing industries. For example, the top three investors in research and development have been automotive companies for the last 20 years. Part of the solution would be, as former Italian Prime Minister Mario Draghi has put it, to create a “new industrial strategy for Europe” and invest more public money in key strategic industries, as “historically investment in Europe has been financed about 80% privately and 20% publicly”.

The trouble for Europe is countries are operating under strict spending rules. Trump’s victory and the ‘America first’ agenda poses problems for Europe, but it could be the trigger they need to push their own industrial agenda. Germany, the largest European economy, certainly has more headroom to spend than other EU member states with its deficit at 1.6% of GDP this year – well below the 3% limit.

Healthcare spending starts to change

Demand for obesity drugs surged in 2024 and is forecast to soar over the next few years. We think the take-up of these drugs will impact the healthcare industry as obesity is linked to 200 chronic diseases.

With obesity costing the UK health service more than £11 billion each year, the government recently announced a weight-loss drug trial as part of a partnership with Lilly, the world’s largest pharmaceutical company. They hope it will help get more people back to work and prevent obesity-related illnesses. If successful, this could be replicated across the UK. The flipside is people may live longer so spending would be redirected towards other areas of healthcare such as elderly care.

We think there will be investment opportunities within industries as consumer preference changes for people taking these drugs. For example in food and drink, sportswear, and the fitness industry.

US equity returns broaden

Last year, US mega-cap technology companies accounted for about 70% of the growth in profits of the US equity market. This year it’s forecast to be 50% of the growth, still high but a narrower difference, which is encouraging for the rest of the stock market. We think Central Banks will lower interest rates but we think longer-term borrowing rates could stay higher as inflation stays sticky. This type of interest rate environment should be good for banks. Other sectors such as infrastructure and energy related companies will benefit from AI rollout. We’re now at the stage of building data centres large enough to require 100 mega-watt hours of electricity – that’s roughly the same power it takes to power a city or town of 100,000 people. Also, Trump should be good for America Inc – having more companies produce goods in America will likely benefit mid-sized US focussed businesses.

Is investing worth the risk?

The market ups and downs will continue – risk, and of course volatility, are a natural part of investing. Markets have, and always will, experience periods of uncertainty, when the risks of the present might seem to outweigh the opportunities for future gains. But markets have shown remarkable resilience over time too, although past performance isn’t a reliable indicator of future performance.

Please remember that the value of your investments can go down as well as up so you might not get back the amount you put in. The views expressed here should not be taken as a recommendation, advice or forecast.