The team at Raymond James, Monument share their views on the year ahead for world investment markets.
Equity markets
The usual Santa rally didn’t materialise as 2024 drew to a close, but this shouldn’t detract from what has still been a positive year for equities, particularly in the US! The outlook for global stock markets in 2025 is cautiously optimistic, with opportunities and volatility likely in equal measure. We expect continued earnings growth, albeit at a slower pace compared to previous years, due to higher-for-longer interest rates.
The US stock market, in particular, is likely to maintain its upward trajectory, driven by strong consumer spending, robust corporate earnings and President Trump’s tax and spending policies. AI is likely to continue to be a major trend, which will benefit the US market. Geopolitical uncertainties will likely influence market movements as the year progresses, which will add to the volatility we expect this year.
The UK market remains one of the ‘cheapest’ in the world and given its mix of cyclical and defensive sectors, could perform quite well during 2025. Whilst economic growth has ground to a halt over the last six months, many economists believe we will see a return to economic expansion during the next 12 months, aided by increased government spending. However, it is still early days to assess the fallout from the increase in National Insurance contributions on businesses and what impact this will have, which is why the focus should be on companies with strong business franchises and pricing power.
Europe’s economy continues to face structural challenges and political uncertainties, particularly in the Eurozone’s two largest economies – Germany and France. This will likely weigh on sentiment towards European equities but should be offset somewhat by a more supportive monetary policy with further interest rate cuts expected.
Asian stock markets are expected to experience varied performance. China’s market may continue to face headwinds due to regulatory crackdowns and slower economic growth. In contrast, markets in India and Southeast Asia are anticipated to perform well, driven by strong economic fundamentals and generally lower debt as a percentage of GDP. The strong US dollar, however, continues to be a challenge for some Asian and emerging market countries.
Sectors
We feel some areas of the market are better placed than others and some key sectors in our opinion are:
1. Technology: Continued innovation and digital transformation should drive growth, particularly in the US and Asia.
2. Healthcare: Ageing populations and advancements in biotechnology should support sector growth globally.
3. Energy: The transition to renewable energy sources will create opportunities, but traditional energy sectors may face volatility.
4. Financials: Stabilising interest rates will benefit banks and financial institutions, particularly in the US and Europe, with American financials also hopefully enjoying a more positive environment due President Trumps planned deregulation policies.
5. Consumer discretionary: Strong consumer spending will drive growth, especially in the US and emerging markets.
6. Infrastructure: Government spending here and across the Atlantic over the next few years should be supportive for companies across the infrastructure landscape.
Inflation
Inflation is expected to moderate in 2025 but remain above pre-pandemic levels. The general feeling is that headline inflation could average around 2.7% by the end of the year, with core inflation slightly lower. The Chancellor’s Budget and President Trump’s policies are potentially inflationary and coupled with persistent supply chain disruptions and geopolitical tensions could pose risks, possibly causing inflationary pressures to re-emerge. As long as inflation remains below 3%, we believe central banks will be fairly comfortable with that.
Interest rates
Despite slightly stubborn inflation, interest rates around the world generally peaked in 2024 and started to come down towards the year end. The Federal Reserve, having cut rates multiple times in late 2024, is likely to adopt a more measured approach this year with the Fed likely to keep rates relatively low to support economic growth. Two 0.25% cuts are now forecast for all of this year. We are also likely to see interest rate cuts by the European Central Bank and Bank of England, although the latter has a slightly harder job trying to balance supporting economic growth against sticky UK inflation.
Bonds
With interest rates stabilising and unlikely to fall as much as originally thought in 2024, bond yields are expected to remain relatively steady. We feel this supports a focus on higher yielding and high-quality corporate bonds over government bonds, although we still advocate having some exposure to UK gilts and US treasury bills in case interest rates are cut more than expected this year and to act as a safety net in case of a deterioration in the world economy.
Overall, we believe 2025 presents a mixed, but generally positive outlook for investors. Wishing all Northern Insight readers all the best for 2025!
www.Monument.RaymondJames.uk.com
Risk warning: Any opinion or forecast reflects the judgment as at the date of issue and is subject to change without notice. Past performance is not a reliable indicator of future results. This commentary is intended for information purposes only and no action should be taken or refrained from being taken as a consequence without consulting a suitably qualified and regulated person. With investing your capital is at risk.