Outlook 2025: a high-octane US has global implications. Positive for equities and high yield bonds

The global economy should keep growing in the coming quarters, with the US outperforming. Inflation should fall close to target across many economies, allowing continued cuts to interest rates. 2025 should prove another constructive year for equities, led by the US. Fixed income strategies should focus on high yield credit, with gold remaining a valuable portfolio diversifier.

For 2025, the world will be shaken up again, amid more adversarial US trade policies. The scale of new tariffs remains unknown, but we expect some compromises on campaign rhetoric. With US ambitions overseas scaled back and less commitment to international institutions, the shift towards a multipolar and fracturing world will accelerate. Global trade will continue to be redrawn among friends, and alliances into rival US- and China-led blocs.

While US tariffs will be inflationary at home, overseas their biggest impact will be to reduce growth. This could push authorities in China and Europe into more radical policy responses, including sharper cuts to interest rates.

While US tariffs will be inflationary at home, overseas their biggest impact will be to reduce growth

An ‘America First 2.0’ economy

We expect new economic, trade and immigration policies to push US growth and inflation higher in the second half of the year. In response, the Fed should keep monetary conditions more restrictive, stopping its rate cuts around 4% in 2025.

We expect some compromises on presidential campaign pledges, and tariffs to be used as a transactional tool to extract trade deals. For now, we believe US debt dynamics remain manageable over the long-term.

Europe – challenges within and without

Eurozone growth is likely to remain low in 2025, with ongoing weakness in Germany.

The prospect of fresh tariffs and less US support for Ukraine poses extra risks at a time when fiscal policy looks ill-placed to respond. We now expect more monetary easing, with the ECB cutting rates to 1.25%, and potentially lower in the event of a severe slowdown.

Will Beijing’s stimulus trump new trade shocks?

President Trump’s US election victory will provide a trade shock for China as Trump is likely to succeed in raising tariffs on Chinese imports to between 30-60%.

Beijing’s fiscal package is a step in the right direction, but it will have to be combined with currency devaluation to offset the tariff shock. China’s long-term challenges will not be addressed effectively by the recent stimulus, but US policy could prove the spur to more radical measures.

Beijing’s fiscal package is a step in the right direction, but it will have to be combined with currency devaluation to offset the tariff shock

Investment strategy - positioning for further growth

A Republican victory introduces the prospect of a financial environment dominated by lower taxes, deregulation, and increased support for US corporate growth. We expect these policies to drive constructive corporate and market sentiment, but with nuances.

While the outlook for equity and credit markets remains positive on a 12-month basis, the impact of tariffs, geopolitical risks, and inflationary pressures will shape the investment landscape. As we enter 2025, asset allocation will need to balance these factors to optimise risk-adjusted returns.

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Despite elevated US equity valuations, 2025 should prove another constructive year for equities. US stocks should lead gains, while we remain less convinced of European stocks’ potential.

Fixed income strategies should focus on high yield credit, balancing income generation while managing inflation and interest rate risks actively.

A stronger US dollar should not prevent gold prices rising. The metal provides portfolio diversification amid shifting macroeconomic trends and policy uncertainties.

Fixed income strategies should focus on high yield credit

Equities – robust returns in 2025

Despite elevated valuations, we believe equity markets are poised to deliver robust returns in 2025, fuelled by double digit earnings growth. Ongoing technological innovation and adoption, the new US administration’s policies, and a stabilising Chinese real estate market are likely tailwinds. Risks include extended investor positioning, and any unexpected slowdown triggered by retaliations to ‘America First’ policies.

The US remains a core holding and we also see strong potential returns in Japan. The eurozone and defensive sectors remain our least preferred segments.

Fixed Income – high yield stands out

Our preferred investments in fixed income for 2025 are corporate bonds. High yield bonds in particular offer attractive yields and lower sensitivity to interest rate movements. Emerging market sovereign and corporate bonds will be vulnerable to US policy shifts but remain in a strong fundamental position.

We expect US government bonds to underperform amid fewer Fed rate cuts and rising long-term yields. We prefer German Bunds and UK Gilts.

Currencies and commodities – US dollar exceptionalism re-invigorated

The US dollar should see broad-based gains in the coming months on US rate re-pricing.

However, the pricing-in of tariffs will likely dominate as a currency market driver over the coming year, with the euro, yuan and North Asian currencies facing significant downside risks.

Barring initial volatility, gold should perform well as investment flows add to support from central bank purchases.

Barring initial volatility, gold should perform well as investment flows add to support from central bank purchases

Hedge funds and private assets

In hedge funds, alternative equity strategies have gained thanks to rising markets and dispersed stock performance, while macro strategies are expected to improve as visibility on US policies and interest rates rises.

We see better times ahead for private markets in 2025, driven by improving dealflow and exits from existing investments. We favour diversification across strategies: from private equity and debt to real estate and infrastructure investments.

We see better times ahead for private markets in 2025, driven by improving dealflow and exits from existing investments

Sustainability in 2025: Adaptation

The US election outcome, political developments in Europe and a firming-up of BRICS+ countries’ common interests will likely re-order policy priorities on international trade, migration, defence, energy sufficiency, industrial policy, infrastructure and sustainability.

We see five key trends emerging: many small transitions towards net zero in line with domestic priorities, the convergence of industrial policy and sustainable goals, a continued focus on infrastructure to support a more sustainable economy, the intertwining of digitalisation and sustainability, and a more multi-dimensional evolution of sustainability.

We focus on sustainable investments that are built on compelling economics or aligned with these shifts in policy priorities, and those that follow from private sector adaptations.