With the end of 2024 in sight, we invited three industry experts to discuss their views on what markets might have in store for investors in 2025.
We were joined by Andrzej Pioch, Lead Fund Manager of L&G’s Multi-Index Funds, Annabelle Rudebeck, Head of Non-US Credit at Western Asset, part of the Franklin Templeton group, and Philip Saunders, Director of the Ninety One Investment Institute. Between them, they discussed market expectations for the year ahead – will equities continue on the same path in 2025? Are bond markets set for a rocky road? How will global inflation look twelve months from now?
Key takeaways
- The Labour budget, despite being labelled as pro-growth, may have a dampening effect on domestic GDP, though a weaker economy could lead to strong returns in the fixed income space.
- In the U.S., Trump’s second term will focus on deregulation, tax cuts, immigration and tariffs with several pro-growth policies likely to drive economic activity.
- Europe faces several headwinds, particularly in Germany and France, although some peripheral countries are currently showing resilience.
The UK view: The impact of the Labour Government in 2025
In 2024, the UK economy displayed slightly better-than-expected growth, outperforming Europe in relative terms. However, the Brexit "healing process" remains a drag, and recent UK budget measures, while labelled pro-growth, are expected to have a dampening effect. As a result, growth is likely to remain lacklustre. For fixed-income investors, a weaker UK economy could lead to strong returns, with markets currently pricing in three rate cuts over the next year - though some believe there could be more.
Whilst highly anticipated, the recent budget failed to provoke strong market reactions, with sterling, equities, and gilt yields largely continuing as they were. Rachel Reeves would have crafted her budget with that intention in mind - particularly to avoid sharply raising gilt yields. That being said, there were concerns regarding how hard National Insurance increases would impact small businesses.
Overall, the UK government’s ambitious spending plans will likely increase borrowing, with markets expecting higher gilt issuance. However, unlike the U.S., where much of the country’s debt is short-term, the UK benefits from a well-termed debt structure extending over 30 years. Furthermore, the UK’s fiscal position appears more stable in comparison to European peers.
Inflation
Inflation appears to be on a downward trajectory, further raising hopes for rate cuts in the UK and Europe next year. However, while recent stable inflation data suggests balance, factors like U.S. tariffs and geopolitical dynamics could disrupt downward trends, particularly when combined with higher energy prices and wage pressures. Despite these lingering concerns, inflation expectations are stabilising, with signs like falling car insurance premiums indicating improving conditions for consumers.
The U.S.
With Republican control of the House and the Senate, Donald Trump’s second term brings a stronger mandate. His agenda represents a shift towards pro-growth policies, with measures aimed at boosting economic activity. He will focus on deregulation, tax cuts, immigration, and tariffs. However, efforts to address undocumented workers face practical hurdles, while tariffs could raise significant revenue but require strategic management.
Initially, the market reacted positively to the prospect of potential tax cuts and deregulation, boosting equities and strengthening the US dollar. However, concerns now persist around the inflationary impact of tariffs and immigration policies - although, these may not lead to structural changes, with inflation potentially stabilising near target levels. This could influence the Federal Reserve’s timeline for rate cuts without significantly altering the medium- to long-term economic outlook.
Meanwhile, attractive yield levels may draw investors back to fixed income, with sidelined funds re-entering markets. Cyclical factors, such as a growing economy and equity market rotation, are expected to persist, creating opportunities outside the dominant sectors. While geopolitical tensions and debt remain concerns, the current environment supports cautious optimism for US equities.
Europe’s outlook
Growth prospects remain mixed in Europe, with regional sensitivities shaping a fragmented outlook suggesting a cautious approach to European equity allocations may be needed - though the prospect of slowing growth does present opportunities for fixed income.
The region faces significant challenges as it navigates demographic headwinds, exposure to tariff risks, and structural economic complexities. Countries like Finland and Germany, with capital-intensive industries, are highly sensitive to rising rates and trade disruptions, while France struggles with budget deficits. Meanwhile, peripheral nations like Spain and Portugal show resilience, with spreads trading tighter than France - an unusual scenario reflecting shifting dynamics.
China and Asia in 2025
China's economic outlook is mixed, but holds potential upside. While consumer sentiment is weighed down by property market struggles, rapid growth in auto exports and renewable technologies highlights China’s global competitiveness. A recovery there could boost Asia, making the region's broader opportunities become even more compelling. This may, though, negatively impact other large economies elsewhere. For instance, Germany, reliant on Chinese demand, faces challenges from import substitution.
Emerging markets and fixed income
Emerging markets (EM) present varied fixed-income opportunities. Interestingly, frontier markets like Africa look appealing thanks to offering high yields, despite default risks. Elsewhere, while EM corporates and investment-grade sovereigns could appear overvalued, their stability justifies these levels. Local EM debt holds promise but faces hurdles from Trump trade policies, U.S. dollar strength, and tariffs. A country-specific approach is therefore essential.
Looking beyond the Magnificent 7 in 2025
Outside of the Magnificent 7, as the outlook for global markets is cautiously optimistic, a new CapEx cycle fuelled by investments in AI infrastructure and energy transition, could create favourable market conditions. This environment contrasts with the weak growth scenarios of recent years. Still, caution remains, as the previous success of major tech companies was partly due to poor growth elsewhere, making future outcomes uncertain.
From a fixed-income perspective, there is recognition of the AI’s potential to speed up research processes, but its immediate impact on markets may be overhyped. While lower interest rates and a recovery in CapEx investments could create a positive backdrop for fixed income, the hope is that the narrative surrounding AI shifts towards more tangible developments in the technology space.
Want to hear about more from our Square Mile investment team on their views for the year ahead?
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