Market Outlook – 2025
When preparing this outlook for distribution to clients, it was of use to look at the views we expressed in the 2024 version, to see how accurate or not we were in how we thought the financial markets would perform in 2024.
Our base case expectation was for a weakening in global inflation aligned to a gradually reducing interest rate backdrop. On inflation we were accurate but the more laboured easing in global interest rates has been a continuing headwind in 2024. We also concluded that the backdrop for risk assets looked positive for the year ahead and broadly this was an accurate prediction. As we indicated in the 2024 outlook, inflation has not magically disappeared, it is still lurking in the real economy and we would expect it continue to be slightly above Central Bank target levels for the foreseeable future. As we look at the year ahead we think the pace of interest rate reductions in 2025 will continue to be cautious. The common denominator that will link the progression of these two measurements of global health in 2025 can be clearly identified, Donald Trump.
The 47th President of the United States of America started his second term in the White House on the 20th January. Love him or loathe him you cannot deny that he is the arch-disruptor. He comes back into power with a clean sweep of Presidency, Senate and the House, which on the face of it should give him control of all the levers he needs to get his policy agenda signed off and into legislation. The caveat to this thesis is that the Republicans are a party that do not like running large budget deficits and the taxation reductions planned by President Trump will increase the deficit. He may not therefore get the necessary support from Republicans to be able to get all his policies ratified. The multiple Executive Orders, that Trump made a great show of signing, in front of adoring supporters on Tuesday, covered a broad range of subjects from immigration to fossil fuel licences. He also started to talk trade tariffs and who they would be applied to. There is nothing really unexpected in what Trump has said so far, as he has continued to vocalise the areas that he based his re-election campaign on.
Trying to predict the direction of markets is notoriously difficult and this is even more so during a period of transformative disruption. Until we see a clear pathway develop in relation to the Trump economic agenda on tariffs, taxation and de-regulation the outlook for the year ahead will be uncertain. What we do know from experience is that trade tariffs are rarely positive for the global economy and can be inflationary. Trumps plans to deport millions of undocumented immigrants is also potentially inflationary as this would create imbalances in the labour market. The balancing act the President has to perform is to ensure that the positives that his pro-business policy agenda will bring are not offset by higher inflation causing interest rates to be higher for longer.
Our investment preference in the US would be a bias towards the smaller company’s sector where the ‘America First’ agenda being pushed by the Trump Administration could benefit this sector of the stock market.
Looking now at the other economies of the world we would comment as follows:
United Kingdom
The base prediction here is that the UK will grow above trend based on the expansionary Autumn Budget announced by Rachel Reeves on the 30th October. It also looks likely that the MPC of the Bank of England will follow a progressive interest rate easing policy in 2025, which will potentially weaken Sterling, which will reduce borrowing costs and also assist companies in the UK who are non-dollar exporters. The benefit to them will be an improved bottom line due to earning in higher valued currencies being revalued back in Sterling terms. The valuation multiples of UK companies are lower than in many other regions and this offers the potential for improved share price valuations in the event that earnings targets can be met. A combination of these factors points to enhanced embedded value in UK Equities. On the negative side, potential Tariffs levied by the US and the rise in Employers Nations Insurance could prove to be inflationary and could impact performance.
Eurozone
Political uncertainty in the Eurozone, primarily in France and Germany has contributed to the underperformance of European Equities. The threat of US Tariffs has also undermined confidence in European assets. The European Central Bank (ECB) has proven to be pro-active in bringing down interest rates more quickly and more significantly than in other developed economies and it looks very likely that the ECB will continue to adopt a policy of easing borrowing costs to boost economic growth within the Eurozone. Inflation also looks to be more subdued in the Eurozone although this could be impacted by Tariffs being levied by the US.
China
In 2024 the Chinese Government stepped in to stimulate the economy with a mixture of fiscal and monetary measures designed to try and drag the economy out of a post-Covid malaise that it had struggled to escape. The strategy has been partially successful but there is still work to be done to underpin the progress made and to combat the potential external headwinds if Tariff threats become a reality. President Xi Jinping has control of the necessary levers to offer continued economic stimulus but a consensus with the US Administration to facilitate friction free trade will help to make that job easier. A healthy Chinese economy lends itself to a supportive backdrop for emerging markets who benefit from strength in the world’s second largest economy.
Fixed Interest Assets
The stickier than expected interest rate backdrop the global economy has faced has led to higher than expected yields in fixed income assets. Whilst interest rates stay at elevated levels, yields on fixed income strategies will stay elevated. If the US do apply a range of Tariffs across different economic trading partners and they then respond with trade Tariffs this will be inflationary and this would also potentially cause Central Banks to maintain rates at a higher level for longer, which in turn maintains fixed interest instrument yields at a higher level. If yields do start to reduce this would most likely be in response to Central Banks reducing interest rates to support economic activity and in this event the capital value of the underlying fixed interest assets will start to rise as yields fall as these elements move inversely. By holding this asset type you are getting paid whilst awaiting reducing yields. The greatest downside risk to the capital value of these asset types is a rise in long-term interest rates.
Summary
The very nature of complex investment markets and the relationship of different asset classes in differing environments makes it is impossible to cover all the possible investment outcomes that we may face in 2025 in this document. The development and monetisation of Artificial Intelligence (AI), the potential impact of a ceasefire leading to an end of hostilities in Ukraine and the ongoing concerns about China and Taiwan are all factors that may become significant positives or negatives for risk assets over the course of 2025. By utilising a blended approach to the allocation of client capital we are trying to harness the potential offered by a risk-on approach in a diversified manner. This methodology incorporates the use of passive and active strategies investing in multi-asset and single strategy funds to try and meet client expectations over the medium and longer-term.
Our broad view is that the potential benefits that a Trump pro-business agenda will bring, should outweigh the more extreme areas of his policy agenda. The relatively elevated level of global interest rates does offer the possibility of an ability by Central Banks to react to any negative impact in the global economy by reducing borrowing costs to help stimulate activity. The worst fears of a global hard landing in 2024 seem to have been navigated successfully and we see scope for that scenario to be maintained in 2025. Against this backdrop we are positive on equities on a selective basis and also see value in holding fixed interest assets as a diversifier within a balanced portfolio.
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