The new year provides an opportunity to reflect on the broader trends in markets and economies while rethinking the major themes that shape investment strategies. Next year there are more reasons than most to start with a fresh perspective.
The second coming of a Trump Presidency and the potential shifts it could bring to global trade, the economy and company earnings, mean investors will have to navigate a more unpredictable landscape, balancing short-term opportunities with potential medium-term risks.
As 2025 begins with these changes still unfolding, understanding the nuanced opportunities and risks across individual asset classes remains critical for successful portfolio positioning in the year ahead. This breakdown highlights key economic and market impacts to consider in client conversations, including how we expect those factors to impact on the outlook across multiple asset classes in the year ahead.
Global economic outlook
The US economy is at a critical inflection point between a possible contraction, or recession, and expansion. Our view is the combination of a still resilient US consumer, strong corporate and household balance sheets together with a ‘just-in-time’ Fed easing cycle will result in a soft-landing for the US economy and the cycle re-inflecting towards expansion.
The economic and market impacts of President-elect Trump’s agenda are still uncertain but it’s clear the election outcome has the potential to significantly impact global trade. The imposition of US tariffs on China and Europe would likely trigger retaliation, resulting in reduced trade and slower growth.
Deglobalisation and increased onshoring, driven by demand for secure and reliable supply chains, would intensify as more goods are produced domestically, though less efficiently. This shift could temporarily drive-up prices, increasing inflation higher and dampening consumer demand.
The return to a global easing cycle has the potential for an ‘upside surprise’ if it results in the return of debt-fuelled growth for both households and corporates. US corporates retain the ability to seize upon lower interest rates to increase debt levels, however most will need clear signs of stabilisation in the economy before increasing borrowings. In Australia, consumers are constrained by higher mortgage servicing costs resulting in less scope for
personal consumption to rise on the strength of additional debt.
The US labour market shows signs that companies remain nervous about the robustness of the US consumer. While not our primary case, if US consumer spending drops too far, a sharp rise in unemployment becomes a possibility, particularly if easing measures fail to provide timely liquidity support.
Globally, the US remains the bright spot, with China still experiencing balance sheet concerns, Europe soft but recovering, and Australian domestic consumption challenged as high interest rates bite.
Equities: Robust fundamentals but stretched valuations
Global equities remain a double-edged sword presenting both upside and downside risks.
On the one hand, strong fundamentals signalled by robust corporate balance sheets and a healthy earnings outlook (particularly in the US tech sector) provide some solid tailwinds for equities heading into 2025. Those factors underpin our mostly positive view of the asset class.
However, a more sanguine view emerges when valuations are considered. Expensive valuations, especially in the US, and euphoric investor sentiment are reasons for a more cautious view of equities over the medium-term.
We agree that the anticipated continuation of central bank easing globally supports corporate earnings growth, particularly in the US technology sector, where balance sheets and earnings quality remain robust, but the late-cycle dynamics creates the potential for asymmetric returns. A balanced-to-neutral approach—focusing on high-quality stocks and sectors with sustainable growth prospects—will be essential.
Fixed income: Defensive positioning amid easing cycles
Fixed income markets stand to benefit from falling short-term interest rates as global central banks continue easing. The Federal Reserve, in particular, is expected to focus on liquidity support to address lingering fragility in the US labour market. However, the medium-term inflationary consequences of pro-growth fiscal policies, especially in the US, are likely to push long-term yields higher.
For investors, bonds offer diversification and protection against potential recession risks, though returns will likely be modest. Emerging market debt also presents opportunities, but careful credit selection will be critical given the uneven recovery across global economies.
Credit opportunities: Hunting yield in a soft-landing scenario
Credit is well-positioned for 2025, with strong corporate balance sheets, still high coverage ratios, and reassuring default rates. Investors in this asset class should focus their efforts on detailed borrower analysis to identify opportunities to lend at attractive rates to creditworthy borrowers. This asset class remains a key component of a diversified portfolio, offering resilience and steady income in a soft-landing scenario.
Conclusion: Navigating 2025’s political and macro risks
In short, the political landscape, particularly in the US will play a significant role in shaping economic and market conditions in the year ahead. Policies under a second Trump presidency flagging potential tariff increases on China and Europe, could disrupt global trade, push inflation higher and reduce consumer demand.
On the flip side, there is the potential for co-ordinated fiscal and monetary easing globally to drive a re-leveraging cycle, particularly in the US where households and corporates retain strong balance sheets. However, it’s a scenario that looks less likely in Australia, where higher mortgage servicing costs continue to keep consumers in check.
On a big picture view of the year ahead it’s clear that, while the global economy faces challenges, including deglobalisation and valuation risks, the ongoing monetary easing cycle and resilient corporate fundamentals provide good reason for optimism.
Dan Farmer is chief investment officer at MLC Asset Management.
