As the markets enter 2025, private banks are looking at where, literally, to put their money. China? The US? Emerging markets? Where is the best bet? PBI asks the experts.
When thinking about 2025 from an investment perspective, similar themes tend to recur: politics, the state of the economy and where we are in the interest rate cycle. Other regional or market-specific factors often feature strongly as well, such as China or the Middle East. And so, we find ourselves asking questions both familiar and new: What will the second Trump administration do, particularly in relation to tariffs? How will it deal with China? What might spring from a potential German election in the new year?
For what it’s worth, our approach is to not get caught up too much in all of this and focus instead on firmer foundations. Is the US economy in broadly good shape? Yes, we think it is, and therefore there’s the potential for US companies to continue to grow earnings. Do certain markets look cheap relative to the US? Yes, we think the UK and Europe both do and so present opportunities to allocate funds at relatively attractive valuations. Therefore, our positioning tends to reflect how we see the big picture overall as opposed to a reaction to any one specific event.
As a result, we are broadly positive on risk assets – meaning equities and credit (or corporate bonds) – believing that most developed markets should avoid recession. We aim to position our equity allocation to include a good spread of ‘value’ and ‘growth’ managers on the basis that while we want to benefit from the growth areas of the market, we are also cognisant that some sectors may be unjustifiably expensive to buy, including some ‘tech’.
In the US, the UK, and Europe we have increased our exposure to small and medium-sized companies as these are cheap relative to their long-term valuations and should benefit from interest rates coming down, particularly if respective domestic economic growth accelerates.
Our view of government bonds is a bit more cautious given the fiscal spending plans for governments across the developed world. We think the increase in supply of government bonds may keep yields on offer higher than in the last decade. As usual, we want to maintain a healthy position to select ‘diversifiers/alternatives’ within our funds like infrastructure and gold, in addition to some hedge strategies. Historically these have provided alternative sources of return, as they did during the pandemic, and more recently the strong performance of the gold price over the last 12 months.
Investment risks present at the start of 2024 (many alluded to herein, including the timing of interest rate cuts, inflation, ‘soft-landing’ and geo-politics) are still manifest today to varying degrees. This uncertainty renders a fund manager’s job tricky and we therefore have not placed any strong conviction trades, keeping our investment decisions predominantly to a broad asset-class level, and generating excellent results for the Close Tactical Select Passive range. Gold, in particular, is a stand-out performer in 2024.
We have greater certainty in 2025 – with Trump in the US, Labour here in the UK, and major economies in decent condition. Even if economic worries reassert themselves in 2025, we know most developed markets are equipped with monetary policy tools to ease and stimulate.
This peace of mind helps us to feel broadly positive on risk assets. We too are positioning our equity allocation to capture both ‘value’ and ‘growth’ factors, mainly through a relatively high weight in UK equities, which predominantly consist of more-traditional ‘value’ sectors and companies; but also by remaining overweight ‘tech’ in US. We are looking for more targeted exposures – whether sectors or thematic – that would benefit from Trump’s future policies, potential further China stimulus and an environment where company fundamentals drive stock market performance rather than sentiment. In Fixed Income we are looking to lower duration (or interest rate risk sensitivity) and get closer to a neutral position by buying shorter-dated maturities. We will be looking to take some profits on gold.
In the background, we continue our fundamental research with interesting new ETF launches in infrastructure, ‘growth’ assets in more concentrated mega-cap names as well as numerous small-cap exposures, all worthy of our attention.
There’s been a lot to digest for the global economy and financial markets in the first half of the 2020s—a pandemic, geopolitical tensions in Europe and the Middle East, some major political shifts and a global energy crisis leading to a significant bout of inflation.
While 2024 has been a year of stabilisation, with inflation and interest rates finally easing and economic growth proving to be more resilient than expected – factors that helped to deliver a stellar return for those investing in US equities – headwinds remain. Inflation risks are back on the agenda and government debt levels, along with simmering geopolitical tensions, are still a cause for concern.
As we now embark on the second half of the decade, 2025 promises to be another year of change with plenty of twists and turns along the way, not least with the return of Donald Trump as President in January following his resounding win in November’s US election.
His presidency will mark a decisive shift in US policymaking, with many of his policies diametrically opposed to those of the outgoing Biden administration. These, and other changes, will reverberate across the global economy, with important implications for financial markets.
Just two years ago investors were fretting as inflation took hold across the global economy and central banks looked set to hike interest rates. Fast forward to today and the economy appears to have defied economists’ gloomy recession forecasts to remain robust.
The global economy is not in bad shape; unemployment in developed economies is close to record lows and output growth is still solid. The Federal Reserve, European Central Bank and Bank of England are lowering interest rates in response to decelerating inflation and to safeguard against risks from relatively high real borrowing costs. Whilst we have seen market expectations of inflation tick up since the US election, the inflation profile remains closer to target than at any other time in the recent past.
Meanwhile, the Chinese authorities are trying to reflate the sluggish economy to avoid deflation. China’s recent stimulus measures include an unprecedented scheme which allows the central bank to inject liquidity in the system to support brokers, asset managers and insurers in purchasing stocks. Does this suggest that the Chinese authorities have taken a “whatever it takes” commitment to support its capital markets and economy?
With Western and Eastern policymakers easing monetary policy, we could see global growth accelerate over the next 12 months.
The US stock market’s performance has been extraordinary over the past decade, consistently outperforming its global peers. The strength and vibrancy of the US economy, along with innovation in the tech sector, has driven company earnings and valuations higher. However, this comes at a cost: investors are starting to consider some of the multiples in the market rather demanding with a high percentage of the overall valuation concentrated in a handful of names.
Even so, we believe US exceptionalism is likely to continue under the incoming Trump administration. It is well known that Trump views the US stock market as one of the most important barometers of economic performance and, as such, he will look to implement supportive policies. This includes maintaining or even reducing an already low level of corporate taxation. He is also expected to slash bureaucratic red tape which could facilitate greater innovation and efficiency with a resulting boost in productivity.
The main risk to this much advertised stance is that Trump follows through on some of his more extreme commitments from the election campaign including sizeable tariffs on Chinese imports and the deportation of millions of undocumented migrants. Such steps are likely to have a negative impact on growth and would put upward pressure on prices.
With global growth set to accelerate over the next 12 months, companies have an opportunity to deliver strong earnings. It is worth noting, however, that the bar for outperformance has been raised. Consensus expectations are for Earnings Per Share for companies globally in the MSCI benchmark to grow 12% in 2025, 3 percentage points higher than the expectations for 2024.1 US listed companies are likely to drive this, with US earnings growth expected to top 14%.1
In recent years, strong corporate performance in the US has been led by the so-called Magnificent 7—Nvidia, Microsoft, Alphabet (the parent owner of Google), Meta, Amazon, Apple, and Tesla—who delivered very strong annual earnings growth – 30% higher than the rest of the S&P combined – during 2023 and 2024.2
In 2025, earnings are expected to broaden out; analysts estimate 18% earnings growth for the Magnificent 7, compared to 12% for the remainder of the S&P 500.2
While the Mag 7 are still expected to outperform on earnings, the gap is far narrower than in recent years. Might the market move to narrow the stock price performance gap too?
Over the next five years, we expect to see more concern amongst investors about government debt levels. Government borrowing spiked during the pandemic as policymakers sought to offset the negative economic impact of rolling lockdowns. In some respects, this was manageable as expenditure could be financed at record low interest rates.
However, the environment has changed. The cost of servicing this debt pile has increased sharply and while we expect to see monetary easing in the next 12 months, a return to record low interest rates seems unlikely. Moreover, governments face growing fiscal expenditures associated with several structural megatrends—ageing societies with ballooning spending on healthcare and pensions, a changing world order meaning higher defence spending, and an expensive energy transition and infrastructure rebuild.
Scott Bessant, the incoming US Treasury secretary, has stated that he wants to reduce the US budget deficit to 3% by 2028, the last year of Trump’s second term. But given the deficit is expected to top 6% in 2024 that looks a tall order.3 With the US debt ceiling requiring an extension in 2025, investors might expect to see more volatility in government bond yields.
Geopolitical concerns appear to be growing. In Eastern Europe, tensions have intensified following President Biden’s green light for Ukraine to use American made long-range missiles to attack Russia. The Israel-Hezbollah ceasefire deal may diminish the risk of further escalation in the Middle East in the short term but peace in the region remains extremely fragile.
How will the incoming Trump administration play in all of this, given his isolationist approach? Can the new US foreign policy ease things? President-elect Trump has made it clear that he wants to broker a ceasefire between Russia and Ukraine, and he can likely count on the power of US financial and military resources to force through a deal. Like his first term, Trump could well impose or threaten severe sanctions on Iran to weaken its influence in the region. That may appease Israel and reduce the risk of further Israeli military strikes on Iran.
Another big unknown in 2025 is China and how far it wants to extend its influence in the Pacific, especially if the US becomes more insular.
The private equity market continues to suffer from low distributions, but in the coming years, we will see stronger growth in the US compared to European markets.
Following Trump’s election win, the US will continue to rebound at a quicker pace. Trump’s projected deregulation will drive investments in the US market. This will come at the expense of European markets, leaving the European private market relatively weaker.
While the US market looks stronger, distributions will not begin immediately upon Trump’s return to the White House—other significant macroeconomic drivers will come into play. The economy needs to see notable improvements, including a higher number of IPOs and M&As.
As a result, new fund investments will not happen in the immediate future, and the PE industry’s recovery will take time.
The secondary market is poised for strong growth, globally, fuelled by several converging factors.
The era of “free money” is firmly behind us, and as LPs adjust to this new reality, the secondary market is reinforcing its role as a critical tool for liquidity. Suppressed buy-side demand in 2024 created pent-up interest, which, combined with an increasing number of motivated sellers in the coming years, will drive secondary market activity to new heights. Transaction volumes could rise significantly, from an estimated $150bn in 2024 to as much as $250bn by the end of 2025.
In Europe, ongoing challenges in the primary market will likely push more LPs toward secondaries. Meanwhile, the US secondary market will benefit from stronger macroeconomic tailwinds and a more robust rebound in private equity activity.
This perfect storm of conditions—liquidity needs, suppressed buy-side demand, and a challenging fundraising environment—sets the stage for secondaries to play a pivotal role in the private markets landscape in the years ahead.
Despite earlier concerns, the US avoided a recession, the eurozone and UK experienced only mild downturns, and China picked up steam towards the end of the year. While there were occasional spikes in market volatility, the overall story of 2024 was one of growth – powered in no small part by structural themes, including the rapid rise of new technologies.
We are also reducing our exposure to European and US investment-grade corporate credit as we do not believe valuations adequately compensate for risks. Finally, with US fiscal policies potentially turning more inflationary, we are swapping shorter-dated US inflation-protected bonds for longer-dated ones.
“Which geographical markets should private banking be looking at in 2025?” was originally created and published by Private Banker International, a GlobalData owned brand.
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