We began the year encouraging investors to lean into risk, and many of the positive market markers we saw at the onset of 2024 will continue as we head into 2025.
Growth is slowing but not collapsing, inflation continues to moderate towards targets, and most central banks are lowering interest rates.
Yet, against this backdrop of benevolent macro-drivers, investors may need to confront a new set of forces.
The global wave of elections in 2024 is behind us, culminating in Trump 2.0 in the US, but geopolitical tensions are high and there are significant uncertainties in trade. Concerns over immigration, fiscal policy, tax cuts and deregulation linger.
The dynamics present challenges, but they also offer opportunities for those who approach 2025 with discipline, strategy and a constructive stance. In other words, cautious optimism.
The past decade has rewarded risk-taking and “beta harvesting” – or passive investing – as central banks provided ample liquidity. However, 2025 calls for a more tactical, risk-managed approach.
The coming year has the potential to deliver modest sub-trend growth globally, moderately lower interest rates, and more modest investment returns than 2024.
Consensus is for a 3.1 per cent global growth forecast for 2024, 2025 and 2026, which is slightly below the long-term average of about 3.5 per cent.
This tempered outlook suggests that aggressive investment strategies are unlikely to deliver the returns seen in previous cycles, emphasising the importance of more moderate risk-taking.
On one hand, isolationist, broad-based tariffs from the incoming Trump administration could send shockwaves across global markets, triggering trade wars, inflation spikes, constrained rate cuts, soaring bond yields and a potential global recession.
But a more measured implementation, such as phased tariffs on China or targeted levies on specific industries, could mitigate these inflationary impacts, potentially supporting more stable economic conditions.
The nomination of Scott Bessent as Treasury secretary hints at a shift towards balancing deregulation and business-friendly policies with inflation management, which markets have received positively so far.
In a recent CNBC interview, Bessent said: “I would recommend that tariffs be layered in gradually. If you take that price adjustment coupled with all the other disinflationary things that President Trump is talking about, we’re going to be at or below the 2 per cent inflation target again.”
As we head into the eye of a political hurricane in the US, investors should maintain a constructive stance – and demonstrate cautious optimism.
Despite fears of rising fiscal deficits and higher bond yields, fiscal policy under Trump could be less aggressive than initially assumed, constrained by a narrow Republican majority and a focus on cost-of-living pressures.
Moreover, geopolitical disruption may not be as severe as some suggest. Trump’s preference for dealmaking hints at potential trade agreements, military truces and energy accords that could stabilise markets over time.
Investors should therefore focus on a proactive approach to managing risk by keeping a close eye on an evolving policy environment that could spark short-term market disruption.
Policy-induced dislocations might include sharp market-wide reactions to new tariff announcements, proposed tax changes or shifting regulations – events that can temporarily mis-price assets or create pockets of volatility.
By staying nimble and alert to these shifts, investors can avoid over-reacting to that volatility, while remaining positioned for buying opportunities as more market-friendly solutions emerge following bold policy declarations.
While global equities remain supported by a resilient earnings backdrop, elevated valuations suggest limited room for error. For example, the MSCI World ex-Australia Index now trades at about 19.5 times forward earnings – well above historical averages – signalling the need for more targeted investments beneath index levels.
A cautiously optimistic outlook for equities persists, particularly in the US, where regulatory rollbacks, potential corporate tax cuts and relative insulation from trade tensions provide tailwinds.
Japan also stands out, with improving corporate governance and macroeconomic stability, while Australia faces mixed prospects due to pressures in its banking and resources sectors.
Across markets, focusing on sectors and regions less exposed to macro risks and emphasising value and small and mid-cap equities over large caps will be key.
In emerging markets, particularly those tied to AI and green energy, opportunities exist but come with heightened risks from geopolitical tensions and trade disruptions, reinforcing the importance of a diversified, risk-conscious portfolio.
In fixed income, moderating inflation and slowing growth suggest yields may have peaked, offering a more supportive environment.
The 10-year US Treasury at 4.3 per cent to 4.5 per cent presents attractive entry points, especially as rate cuts take centre stage in early 2025. Investment-grade credit, particularly subordinated tier 2 bank debt, continues to provide opportunities, with robust yields above 6 per cent meeting strong demand.
Investors should also consider longer-duration domestic government bonds given favourable yield curves and a focus on duration as rates decline.
Private equity and private debt remain compelling amid falling rates and improving activity.
Diversified exposures in infrastructure, real estate and niche alternatives such as royalty and litigation finance could yield attractive, uncorrelated returns. Hedge funds might similarly provide essential diversification, benefiting from dislocations and dispersion in volatile markets.
As we head into the eye of a political hurricane in the US, investors should maintain a constructive stance – and demonstrate cautious optimism.
While global growth is slowing, inflation is moderating and interest rates are being lowered.
The outlook remains tempered by an uncertain political and geopolitical landscape.
Evolving US fiscal policy, the potential for trade disruptions and heightened tensions in key sectors suggest the year ahead will require a more measured approach than that of previous years.
If 2024 was a year to lean into risk, 2025 is likely to be one where investors need to tactically buy the dips.
