Advisers and wealth managers are all too familiar with factoring in uncertainty when planning investment and asset allocation strategies. Looking ahead to 2025, in the following analysis, Abhi Chatterjee (pictured), Chief Investment Strategist, Dynamic Planner, has shared his headline thinking with us on what might be the key considerations for investment markets and sectors for the year ahead.
2024 could be remembered as the year of elections – a year in which approximately 25% of the global population exercised their right to vote. While it is always fills one with wonder to see democracy at work, election years are often fraught with uncertainty. Whether it’s primarily a two-party system, as in the US, or a multi-party one such as the UK, the potential outcomes can be befuddling given the combinations possible. But we are through that now, and all that remains is to await the evolving outcomes once the dust settles.
The prospect of change
Looking forward to 2025, a major source of influence on macroeconomic outcomes will be governments. If there was a key takeaway from all the elections, it has been the success of the anti-incumbent vote. At home, the ruling Conservative party was swept away by an overwhelming majority for the Labour party. In Europe, Germany and France were rocked by voters flocking to populist parties, and only managed to stave off control by these parties by cobbling together coalitions of parties of diverse ideologies. In India, the ruling Bharatiya Janata Party, widely expected to increase its mandate, was given a bloody nose by the local parties, forcing it to form a coalition to stay in power. Finally, in the US, a race that had been too close to call turned into a rousing endorsement for Trumpian messaging. While there are numerous debates underway as to the whys and wherefores of such results, what they ultimately mean for macroeconomic policy in general – and more so for markets – is change. Change brings uncertainty, and along with uncertainty comes volatility.
A primary concern for markets has been growth. Most of the developed market economies are in the doldrums. The manufacturing heart of the eurozone, Germany, has shown lacklustre growth on the back of sluggish exports, with energy shortages also playing a part. France and the UK remain in the same boat, with a moderate uptick expected in 2025.
In Asia, China has announced fiscal measures to support the economy. Over time, this should have an impact on growth. The growth engines in emerging markets, especially Asia, should see better prospects on the back of stronger domestic demand.
The only clear bright spot globally remains the United States, where the economy has been humming along due to major fiscal policies enacted by the incumbent government. Should this remain the base case globally, we should expect modest growth, which will be helped by easing inflation. However, changes in the political landscape do raise significant risks to this scenario.
Potential for volatility in government debt
Given the above, we expect the government sector to be the most affected. This includes issuances by government, including government bonds. Given the increasing budget deficits required for investments in infrastructure as well as social programmes, government borrowing is expected to increase, raising concerns about the ability to service the increased debt burden. Thus 2025 is likely to bring greater volatility in government bond markets. The outlook on inflation also feeds into this: granted inflation is projected to fall to central bank targets, but the shifting sands of policy mean there is uncertainty surrounding the projection. The combination of prospects for more protectionist US policy and China’s struggles could lead to possibly significant trade disruptions, which will invariably lead to higher prices as globalisation grinds to a halt. This could hamper growth in economies that export to the US – primarily Europe and China – as well as causing rates to stay higher for longer and producing tighter monetary conditions.
Pros and cons for equities and corporate debt
In the meantime, the corporate sector seems to be in a healthier position. Earnings across regions have been strong, especially in the US. In Europe, though more uncertainty prevails, there is strength in some sectors. In addition, most corporates have taken advantage of lower rates to lock in favourable borrowing costs and extend maturities of debt across the board. As rates have started to come down, 2024 has become one of the busiest years for corporate bond issuance, and the trend is expected to continue in 2025. It is widely expected that the Trump administration will be supportive of corporates through both tax cuts and reduced regulation. This puts US corporate sector, on both the equity and fixed income sides, in a favourable position. In Europe, there are likely to be sectoral winners and losers given the slowdown in China, a critical market for European companies. An unknown variable for global corporates will be the impact of future US policies. Should protectionism and trade wars be the order of the day, global trade will experience severe friction, adversely impacting both companies that trade with the US and the global economy as a whole.
Up, up and away for infrastructure?
One sector expected to experience secular growth is infrastructure. Spending on capital projects has begun to rebound and is expected to accelerate significantly, with global spending forecast to increase to around USD 9 trillion for 2025, given the impact on employment and vital services, not to mention the economy. The World Economic Forum estimates that every dollar spent on a capital project (in utilities, energy, transport, waste management, flood defence and telecommunications) generates an economic return of between 5% and 25%. Moreover, leaders in both the developed and emerging markets have realised the importance of investment in infrastructure and the impact of its lack and have been putting in place policies to upgrade existing infrastructure as well as building more. With government debt burdens increasing, private investors will be called on to do more, with the significant backing of governments.
A rising tide doesn’t lift all boats
Looking forward, there seem to be two distinct themes – one each for the government and the corporate sector. Governments, through their policies and deficits, can significantly alter the macroeconomic landscape, but until the policies and their impact become clear, government issuance will see heightened risk. For now, safety may have to be sought elsewhere, rather than in this major “risk-off” asset. Corporate fixed income is likely to be a beneficiary, given that corporates are so buoyant, although strong corporate earnings are reflected in tighter spreads. Equity remains the asset of choice, on balance, given the policies expected to be enacted. But it would be unreasonable to expect the rising tides of markets to lift all equities – and this does not look like a period that will favour a passive or index-based approach. More dispersion means this is an analysts’ market, in which research on sectors and names has the potential to provide better risk-adjusted outcomes.
