As we look ahead to 2025, we are entering a period of significant change, driven by shifts in market dynamics and deeper structural forces. While we remain optimistic on risk assets, success will require nimble portfolio management and careful attention to evolving market conditions. Several powerful supertrends are reshaping the investment environment:

• The changing world order is driving increased government spending on defence, healthcare, and energy infrastructure, suggesting a persistently higher inflation environment.
• The AI Revolution: With the artificial intelligence sector projected to reach US$143 billion by 2027, we are seeing unprecedented opportunities across technology, healthcare, and productivity enhancement.
• The Energy Transition: The shift to sustainable energy requires approximately US$4 trillion in annual investment. This creates opportunities in both established clean energy companies and traditional energy players as they shift toward sustainable solutions.
• Living 2.0: With the over-60 population in developed markets expected to nearly double by 2050, we see compelling opportunities in healthcare, automation, and consumer sectors serving this growing demographic.

Macroeconomics: A year of volatility

Against this backdrop of structural change, the return of President Trump to the White House marks a significant shift in market dynamics. The US economy looks set to maintain its strength in 2025, boosted by Trump's “America First” economic approach. His administration plans to extend the individual tax cuts set to expire in 2025, and further reduce the corporate tax rate from its current level of 21%. Additionally, a broad deregulatory agenda is expected to ease business restrictions and boost consumer confidence, particularly benefiting domestic industries.

While these policies are designed to stimulate domestic growth and improve corporate earnings, they may also contribute to sustained inflationary pressures. For example, Trump has proposed imposing a steep 60% tariffs on Chinese exports and a 10% universal tariff on other trading partners. On immigration, he intends to implement stricter restrictions that could limit labour supply and potentially drive wage inflation. In response, we expect the Federal Reserve (Fed) to keep interest rates higher, pausing its rate-cutting cycle at around 4% in early 2025.

In Asia, US tariffs are also likely to curb the growth of large exporting nations, including China and Japan, forcing governments to take more action to support their domestic economies. However, we believe many Asian economies are better positioned to weather these challenges than during Trump's previous administration.

The outlook for European markets is more challenging. Higher US tariffs and reduced US commitment to regional security could pressure growth and worsen budget deficits. We expect the European Central Bank to cut interest rates to 2% or lower to support the economy, though this could weaken the EUR further.

Where to invest in 2025

In this environment, we see compelling opportunities in several key areas. The US growth story is compelling, driven by tax cuts and business-friendly policies. We expect corporate earnings to grow by 16.5% in 2025, pushing the S&P 500 toward our 12-month target of 6,530. We are optimistic about US stocks, especially in three key sectors. Technology leads the pack, with artificial intelligence and semiconductor companies at the forefront of innovation. Healthcare companies are well-positioned to benefit from ageing populations and breakthrough medical technologies. Consumer sectors should thrive from strong domestic spending and economic stimulus.

Asian markets also offer another compelling opportunity, particularly in India, Indonesia, Philippines, Singapore, Hong Kong, and China. Despite tariff-related headwinds, China's market valuations remain attractive, and we anticipate further stimulus measures in 2025 to support economic growth. We advocate a barbell strategy by investing in established, large-cap technology and platform companies for growth potential, while also holding quality dividend-paying stocks for stability. We are also optimistic on beneficiaries of policy changes.

We are currently taking a cautious approach to Europe and Japan and do not see a compelling reason to increase investments in these markets at this time. This is because both regions are grappling with their respective issues, such as political uncertainties, ailing competitiveness and currency volatility.

Overall, we remain optimistic on equities in general, in particular US and Asia ex-Japan equities. We are less enthusiastic about European and Japanese markets, where we see fewer opportunities currently.

Fixed income: Paradigm shift

The fixed income landscape in 2025 requires particularly careful navigation. We expect the 10-year US Treasury yield to climb to 5.00% in the next 12 months, driven by persistent inflationary pressures and President Trump's expansionary fiscal policies. This environment calls for a defensive approach to bond investments, with several key strategies worth considering.

For US Treasuries and Developed Markets Investment Grade bonds, consider reducing exposure, particularly to longer-dated bonds. Think of it this way: when interest rates rise, existing bonds lose value, and longer-term bonds face the biggest price declines. Instead, we prefer bonds with maturities of 5 years or shorter. These shorter-term bonds offer two advantages: they provide decent yields in the current environment while being less sensitive to further rate increases.

High-yield bonds present a more nuanced picture. The higher US dollar and tariffs should translate into wider Emerging Markets spreads over the next 12 months. While their higher yields look attractive, the economic uncertainty calls for careful selection. The spread pick-up over Developed Markets High Yield bonds is at historical lows, providing limited compensation for additional risk exposure. As such, it is important to exercise caution when considering investments in Emerging Markets and Developed Markets High Yield bonds. Striving for a balanced portfolio while being aware of the inherent risks can be a sensible approach.

Alternative investments: Sparkle amidst uncertainty

Alternative investments play a crucial role in our allocation strategy. We remain positive on gold as it tends to perform well when inflation is high and when there are concerns about rising government debt and spending, even when other asset classes may deliver negative returns. The US dollar is expected to retain its strength, supported by relatively robust US growth and limited rate cuts. This currency outlook influences our regional allocations and reinforces our preference for US assets.

Conclusion: Navigating an evolving landscape

In summary, the investment outlook for 2025 presents significant opportunities arising from supertrends and macroeconomic shifts. The return of President Trump introduces both potential growth catalysts and inflationary risks, making strategic portfolio management crucial. By focusing on sectors poised for growth, such as technology, healthcare, and consumer goods, and by maintaining a balanced allocation across equities, fixed income, and alternative investments, investors can navigate the complexities of this evolving landscape.

Remember that while these insights reflect our best thinking on market opportunities, your personal investment strategy should align with your individual goals and comfort with risk.