No time for complacency

With a record number of global elections, ongoing preoccupation with the outlook for monetary policy, and bouts of extreme market turbulence 2024 was an eventful year. However, this complex backdrop did not impede equity markets: the S&P 500 Index in the US climbed more than 25%, close to record highs. Gold prices also soared, indicating heightened uncertainty, while returns from government bonds were lacklustre.

 

As we look into 2025, what trends are likely to influence financial markets — and where should investors look for potential opportunities? 

 

Interest rates are on the descent

 

Inflation and interest rates have been critical issues for investors over the past few years, putting central banks, and the US Federal Reserve (Fed) in the spotlight. Entering 2025, major central banks are currently reversing their recent aggressive interest rate hikes. Investors have waited longer for this process to begin than they had imagined. The Fed, for instance, kept rates on hold for 18 months before finally cutting them in September 2024.

 

For David Knee, deputy CIO fixed income, the Fed’s higher for longer stance challenged accepted economic theory. He observed that despite the 5% rise in US interest rates and elsewhere, advanced economies have displayed remarkable resilience. Instead of triggering a recession, 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, though the global rate-cutting cycle is now underway, there is uncertainty about the scale and pace. 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 is the Bank of Japan, which seems set to raise rates in the coming year as Japan emerges from decades of deflation.

 

Caution required for bonds

 

What are the implications of normalisation of interest rates for global bond investors? According to David Knee, absolute yields were still attractive on both very short-dated bonds and those with longer maturities as they offered some protection against any potential increase in inflation. 

 

He suggested bonds with longer maturities offered a potential counterbalance to equity exposure if the macroeconomic story deteriorated and stock markets fell.

 

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. 

 

Knee’s assessment is that bond investors require caution for 2025, and it could be beneficial for portfolios to be defensively positioned.

 

The impact of Trump

 

A new major source of potential uncertainty for financial markets could be Donald Trump. Since his election victory in November 2024, the impact of his ‘America First’ policies such as tariffs and immigration curbs have dominated market commentary and headlines.

 

As we move into 2025, Fabiana Fedeli, CIO equities, multi asset and sustainability, suggested the Trump trade — investing in stocks that might benefit from his policies — will probably remain a focus of many investors. 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, especially 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, only time will tell how many of the proposed policies are 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 can perform equally well. Fedeli expected further broadening of returns across the market in areas that, so far have remained in the shadows. She also believed there are compelling bottom-up, stock-specific opportunities in other markets, such as Europe and Asia. 

 

In Europe, she pointed 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 stock picking opportunities for bottom-up investors.

 

As investors prepare to navigate the year ahead, Fedeli believed the key focus in 2025 should be on finding the areas 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.

 

Private market growth trends look set to continue

 

Investor interest in private markets, or alternatives, has been growing in recent years and Emmanuel Deblanc, CIO private markets, believed this trend would 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 private market investments to a wider investor base.

 

Deblanc was optimistic that 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 had a positive outlook for private credit. The asset class has been resilient across market cycles. 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 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, 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. 

 

Read more on M&G Investment Perspective here:

  

For Hong Kong readers, click here.

 

For Singapore readers, click here.

 

For all other readers, click here.

 

Or find out more about M&G capabilities, contact us at [email protected]

 

The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested. Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast.

 

_{For Professional Investors only. Not for onward distribution. No other persons should rely on any information contained within. In Hong Kong, this material is for professional investors only and issued by M&G Investments (Hong Kong) Limited., and in Singapore, for institutional investors and issued by M&G Investments (Singapore) Pte. Ltd. (UEN 201131425R), regulated by the Monetary Authority of Singapore; elsewhere by M&G Luxembourg S.A. Registered Office: 16, boulevard Royal, L-2449, Luxembourg.All forms of investments carry risks. Such investments may not be suitable for everyone. The information contained herein is provided for information purposes only and does not constitute an offer of, or solicitation for, a purchase or sale of any investment product or class of investment products and should not be relied upon as financial advice. The contents of this document have not been reviewed by any regulatory authority.}