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The article was first published in The Business Times on 21 December 2024.
It’s that time of the year again. As we look beyond the few remaining days of 2024 towards – we hope – fresh and rewarding investment opportunities for 2025, investors the world over are asking, “where should I put my money?”
It is worth reminding ourselves that 2024 delivered an above-average year for investor returns, with strong, well rounded performances from equity, fixed income and gold in particular. We continue to see a positive economic backdrop continuing in 2025, yet growth and interest rate outlooks will diverge across economies, making active management essential.
So how portfolios should be optimally positioned at the start of a New Year - and how assets should be most efficiently allocated – is one of the most important decisions investors can make. As always, the goal is to maximise returns and minimise risk via the cheapest and most effective hedge available, diversification. It sounds pretty straightforward, but accurately and appropriately positioning portfolios for the year ahead is complex and challenging.
Should an investor stay with the same allocations that worked last year? Or should they shift into different assets in the hope that they will outperform in the coming 12 months? Inevitably, the consequences of getting this call wrong is underperformance and even potentially capital loss. There is a lot at stake.
1. Reducing cash and deploying capital
We expect recession risks to be low in 2025 and anticipate central banks cutting interest rates on continued disinflation. Where we see the lowest central bank rates (Switzerland and the eurozone), there is most incentive to deploy capital into markets, ensuring adequate diversification.
We expect recession risks to be low in 2025 and anticipate central banks cutting interest rates on continued disinflation
2. Investment grade and high yield corporate bonds to outperform
We prefer the yields offered by corporate over government bonds across developed and emerging markets. Higher corporate yields can provide attractive sources of income for multi-asset portfolios. In emerging markets, our preference is also for corporate over sovereign issuers. We favour 3-5 year maturities for US dollar-denominated investment grade corporate bonds. In high yield, we favour short-dated bonds.
3. Government bonds to underperform; prefer German Bunds and UK Gilts
In a world of rival geopolitical blocs, strategic competition requires investment, leading to increased public debt. Yet government bonds can offer a haven in periods of high geopolitical risk. In the US, more stimulative economic policies and a rising deficit could see yields rise and US Treasuries underperform. Better prospects exist for UK Gilts and German Bunds, in our view, as interest rates are reduced to support growth.
4. Equities to benefit from resilient growth and lower interest rates
Historically, equities have done well in periods of sustained growth and falling interest rates. We expect strengthening corporate profitability under the next US administration to extend the performance of US equities. Japanese companies should also benefit from equity-friendly domestic policies and a currency less prone to appreciation. In emerging markets, strong technology-related exports should provide a tailwind for Taiwan and South Korea, notwithstanding political (rather than economic) uncertainty in the latter.
Macroeconomic conditions and the investment needs of a multipolar world are likely to benefit cyclical sectors
5. Cyclical sectors to outperform, with a preference for materials
Macroeconomic conditions and the investment needs of a multipolar world are likely to benefit cyclical sectors. We believe materials will be the first to benefit from the tailwinds this creates. More sectors will follow, including industrials, later in the year.
We expect the US and (certain European) elections to act as catalysts in developed markets to boost infrastructure spending. In emerging markets, investment remains strong, with the extension of the BRICS group focusing attention on infrastructure. In equities, we focus on stocks from companies along the length of the value chain, from materials to infrastructure operators.
7. Real estate as an income alternative in low-yielding markets
With falling central bank rates and a solid growth outlook, real estate investments offer alternative sources of income in markets with comparatively low bond yields. The clearest cases for real estate investments as a fixed income alternative are in Switzerland and Singapore.
8. Hedge funds and private assets expand the investment universe
In hedge funds, the performance of event-driven and relative value strategies’ improved in 2024. Since the US election, hopes for a lighter regulatory touch is expected to stimulate dealmaking. In private assets, we see private equity as a tool to broaden the set of investment opportunities in portfolios. These opportunities also provide portfolio diversification, as the number of listed companies has declined in many markets.
In private assets, we see private equity as a tool to broaden the set of investment opportunities in portfolios
9. Gold will still add value in 2025
Lower central bank rates reduce the opportunity cost of holding gold as a non-yielding asset. But central bank buying to diversify reserves from US dollars, in part as a response to geopolitical developments, should also keep supporting gold prices. A stronger US dollar is a headwind for gold, but we do not think it will prevent individual investors increasing investment flows into gold.
10. US tariffs and interest rate differences support the dollar
The US dollar will likely emerge as a key beneficiary of the new Trump administration and its policy priorities in 2025. This will further extend the theme of US exceptionalism. We expect most currencies to weaken against the dollar, especially currencies of open economies. These include the euro, sterling and Asian currencies including the Chinese yuan. We expect the Japanese yen to initially suffer against the dollar in 2025, although US tariff risks could see greater resilience from both currencies in the latter part of the year.
