US Policy and Deficits Add Uncertainty
Our outlook, of course, is subject to change given several uncertainties in the mix. We’re closely watching policies expected out of the new US administration, which have already led the Fed to slightly adjust its outlook. Higher import tariffs and tighter immigration measures could increase short-term US inflation and drag down global growth. It’s difficult to assess the final impact until the size, breadth and implementation pace are known. We also need to see how firms will respond, and whether they readjust supply chains, or pass through or absorb price increases. Still, we believe policy scope will be limited, considering that politicians may be unwilling to add to already high inflation and interest rates.
Rising concerns on fiscal sustainability are likely to constrain fiscal policy in the US and other developed markets, including the UK, France and Germany. As a result, we don’t anticipate meaningful growth or inflation impacts from government spending.
An Expanding Opportunity Set for Multi-Asset Strategies
We think economic progress across more markets will present broader opportunities for multi-asset investors in 2025. Economic growth supports earnings growth, which tends to be supportive for risk assets, such as equities.
Among developed market equities, we favor exposure to the US, the euro area and Japan. In contrast, emerging markets remain challenged due to secular headwinds to China’s growth. Policy support to rebalance its economy has been disappointing so far, and the prospect of rising trade barriers could amplify problems.
Sovereign Bonds Offer Long-Term Value
Given real yields are near historical highs, we see long-term value in bonds despite near-term uncertainty. With high starting yields, they also offer compelling income potential. We currently favor sovereigns in the UK and Germany, where yields are likely to fall more, relative to other countries.
Corporate credit spreads are now historically tight due to solid fundamentals and a resilient economy. In this environment, we think it makes sense to shift some focus to stocks, seeing the risk-reward profile of equities currently more advantageous.
To sum things up, US economic growth should continue to outpace peers, but we anticipate gradual convergence across developed markets. However, we remain aware that some regions, especially exporters, remain vulnerable to potential changes in US policies. From our perspective, this just makes it more imperative for multi-asset investors to stay flexible and selective as the backdrop changes.
