Favorable winds: 2025 presents opportunities for asset allocators
Ashwin Alankar, Head of Global Asset Allocation, believes global financial markets have the potential to perform well in 2025 but cautions there are many differences between now and incoming President Trump’s first term.
5 minute watch
Key takeaways:
- Analysis of forward-looking market data indicate that global capital markets could perform well in 2025, owing in part to the pro-growth economic agenda of the incoming Trump administration.
- While equities appear well positioned to deliver attractive returns in an extended cycle, U.S. stocks, in contrast to the early part of President Trump’s first term, are likely to outshine ex-U.S. equities.
- Although the outlook for many fixed income segments is favorable, investors must be mindful of pro-growth policies’ inflationary effects, especially as the recent bout of inflation is fresh in American consumers’ minds.
Monetary Policy refers to the policies of a central bank, aimed at influencing the level of inflation and growth in an economy. It includes controlling interest rates and the supply of money.
Volatility measures risk using the dispersion of returns for a given investment.
IMPORTANT INFORMATION
Equity securities are subject to risks including market risk. Returns will fluctuate in response to issuer, political and economic developments.
Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.
Ashwin Alankar: At times like today, amid a confluence of economic, political, and social unknowns, data are especially important to bring clarity to a system that otherwise appears quite chaotic. Across many different datasets that we have analyzed, from future risks priced by options and derivative markets globally to historical periods similar to today identified by pattern recognition algorithms, we are optimistic about capital markets heading into the new year. We expect the downside risk to capital markets and recession risk to be muted, enabling investors to source equity risk premiums and fixed income risk premiums in relative safety.
But, to no surprise, potential policy changes under a second administration by Trump will be a significant factor determining capital market performance. Because today’s starting point and today’s starting conditions are very different from the starting conditions when Mr. Trump was first elected president in 2016, we absolutely cannot expect capital markets to behave exactly the same way they did back in 2017. This would make investing way too easy.
So let’s take a look at where assets are likely to perform similarly to Mr. Trump’s first year as president and where performance could diverge this time around, starting off with global equities. We all know global equities performed exceptionally well when Mr. Trump was first elected president back in 2016. Ironically, despite tariffs, despite other protectionist policies, non-US equities in fact outperformed US equities.
But, unlike today, back then, non-US countries were showing clear signs of strong economic rebound. So, while we expect equities in general to perform well in the medium term, coming into the new year, we expect US equities to lead the pack and to be a more attractive place to source equity risk premium. Another point of departure is, we also do expect lower-volatility, higher-stability stocks to shine as we are much later in the business cycle today than we were back in 2016.
Now on to fixed income. Interest rate volatility was very high during Mr. Trump’s first year as president and we expect the same to unfold in 2025. Moreover and more importantly, we also expect there to be greater upward pressure to interest rates today than previously because Mr. Trump’s pro-growth policies represent a much greater and significant threat to inflation this time around.
It is much easier to ignite inflation when the memory of rising prices is still fresh in consumer’s minds, just like it is today. We believe the risk to higher rates is more severe here in the US than outside of the US, given lackluster growth we expect in other regions.
Lastly, on currencies, unlike 2017, where the US dollar rally lost steam, we expect dollar strength to continue throughout most of 2025 as economic growth outside of the US is not the bright spot that it was back in 2017. Furthermore, the US administration’s pro-growth policies will likely delay interest rate cuts and accommodation by the Federal Reserve, lending further support to a strong US dollar.
So, while history is repeating with Donald Trump back in the White House, you likely will not see an exact repeat of capital market performance. Understanding the points of similarity and understanding the points of departure should prove to be quite valuable as investors navigate where best to invest in 2025.
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5 minute watch
Key takeaways:
- Analysis of forward-looking market data indicate that global capital markets could perform well in 2025, owing in part to the pro-growth economic agenda of the incoming Trump administration.
- While equities appear well positioned to deliver attractive returns in an extended cycle, U.S. stocks, in contrast to the early part of President Trump’s first term, are likely to outshine ex-U.S. equities.
- Although the outlook for many fixed income segments is favorable, investors must be mindful of pro-growth policies’ inflationary effects, especially as the recent bout of inflation is fresh in American consumers’ minds.