2025 will be a high octane diet for portfolios

A year of divergence lies ahead – in growth, inflation, central bank policies, and investment opportunities.

The global economy should keep expanding. Many central banks, including the Federal Reserve, should keep cutting interest rates as inflation falls to target.

But a second Trump administration will set the US apart. It’s a high-octane diet for the US economy. Growth should be spurred by tax cuts, deregulation, and infrastructure spending. Tariffs will be to some extent inflationary and limit the Federal Reserve’s ability to cut interest rates below 4%.

Outside the US, the main impact of tariffs will be to weaken growth. The eurozone economy could therefore remain lacklustre. Can US policies be a catalyst for change? For now, we see little prospect of reversing weak investment and productivity. Even a new German government is unlikely to release the brakes on fiscal policy, while France faces political instability.

US growth should be spurred by tax cuts, deregulation, and infrastructure spending

China’s authorities now have two major challenges – stabilising the property market and offsetting the impact of US policies. More stimulus is likely. Emerging markets will also be challenged by US tariffs and a strong dollar. Yet fundamentals in many economies have improved, helping to limit stresses.

There are many risks to this outlook, not least the volatility of US policies, and its implications for interest rates and debt sustainability. China’s stimulus could disappoint once again. And of course, geopolitics remain a prominent risk.

In a multipolar world, investors need to prudently manage risks and seize opportunities. New US policies will continue to create more market volatility.

We’re entering 2025 with higher risk exposure in portfolios. That’s because we see another constructive year ahead for equities, although perhaps not as outstanding as in 2024.

We see another constructive year ahead for equities, although perhaps not as outstanding as in 2024

‘America First’ policies will of course benefit US assets. Despite high valuations, US stocks should gain from deregulation, lower taxes, falling interest rates and solid growth; we retain our overweight exposures here.

In fixed income, our overall allocations stand at strategic levels. We favour corporate bonds where investors can benefit from high yields, while default risks look contained.

In currency markets, we see the US dollar as a key beneficiary of the new Trump administration. It should stay strong thanks to demand for US assets and higher interest rates than in other advanced economies. Later in the year markets may focus more on the impact of tariffs. We would then expect the Swiss franc and Japanese yen to be more supported.

We also believe gold prices will stay high in 2025, despite the strong dollar. Haven investment flows should add to demand from central banks.

Finally, alternative assets have a more important role in multi-asset portfolios. Hedge funds, real estate and private assets can all extend the range of potential investment returns.

With US policies in the driving seat and a multipolar world, it’s time to anchor portfolios in solid and transparent assets. By staying vigilant, and actively steering portfolios, we will take advantage of the investment opportunities that are sure to materialise next year.