News of Donald Trump’s conclusive US election win has led to endless speculation about what his policies might be. In this environment, it is always useful to step back and focus on the bigger picture trends.
We have written before about the changing investment regime: a shift to a multipolar world, more proactive fiscal policies, and higher interest rates compared to the last decade. The post-Global Financial Crisis environment of tight fiscal policy, zero interest rates and liberalised global trade was not working for the average person in the West, leading to support for more populist policies.
In this context, Trump is more of a symptom than a cause of the political environment. His second term will represent an intensification of trends that were already in place: loose fiscal policy and an ongoing reaction against globalisation in the form of higher tariffs (note that Biden did not reverse the tariffs imposed by Trump in his previous term).
What does this mean for markets in 2025? Leaving aside political risks, the economic backdrop remains benign. Inflation has moved in the right direction and interest rates are falling in the US and Europe. We expect a soft landing, and our expectation is that growth will reaccelerate as we move through 2025.
Look beyond recent winners for return opportunities
Turning to equities in more detail, the S&P500 is looking expensive but valuations away from the mega caps and outside of the US appear more reasonable. Equity investors have grown used to a small number of large companies powering the stock market’s gains; however, this pattern is already changing.
We think there is potential for markets to broaden out further in the US, particularly given Trump’s focus on deregulation and corporate tax cuts.
Beyond the US, trade will be an important area of focus if Trump implements in full the tariffs he announced during the campaign. In practice, such widespread tariffs might be hard to implement into law, but the uncertainty will encourage US companies to reshore in any case. This could boost US growth at the expense of its neighbours, but we would also expect more monetary stimulus outside of the US to offset this.
So, all in all, we see scope for positive returns from equities in 2025, but investors may need to look beyond the recent winners.
We also need to recognise that the risks are increasing as positive expectations get baked into market valuations. In particular, around a 4.5% to 5% yield on the US 10-year bond, we would judge that comparisons with bond valuations would pose a speed limit to equity returns (this arises because higher bond yields can draw money away from the stock market, as well as increasing borrowing costs for corporates).
As mentioned above, we remain positioned for a soft landing which is a benign outcome, but when thinking about the risks around that scenario, our bias is still to worry that the US growth environment might be “too hot” rather than “too cold”. Curbs on immigration and policies to boost the corporate sector could increase the risk of domestic inflation, curbing the Federal Reserve’s ability to deliver rate cuts.
Bonds offer attractive income
Which brings me onto bonds. As I’ve outlined previously, we believe that we’re in an environment that is very different to the deflationary, zero rate regime of the 2010s. As a consequence, bonds don’t offer the same negative correlation benefits that they did in the last decade.
However, the old-fashioned reason for owning bonds – to generate income – is back and we continue to argue for their inclusion in portfolios. Divergent fiscal and monetary policies around the world will also provide cross-market opportunities in fixed income and currency. Strong corporate balance sheets support the yield offered by credit markets.
To the extent that investors are seeking diversifiers, we continue to like gold as it provides a hedge against recession risks like bonds. It is also a good store of value in the event of more stagflationary outcomes and geopolitical events.
Diversification holds key to portfolio resilience
And that brings me to the importance of portfolio resilience. While the economic backdrop generally looks favourable for returns, we can’t gloss over the fact that there are many risks to markets. We are facing disruption on unprecedented scale and it’s taking various forms.
We’ve already mentioned the potential disruption from tariffs and trade wars. There are also the ongoing conflicts in the Middle East and Ukraine where the risks of political miscalculations can’t be ignored.
The transmission mechanism of geopolitical events to markets is typically through commodities. As an asset class, commodities have been out of favour due to global growth worries, but they have an important role to play in offering diversification and creating resilient portfolios. Energy is one way to play this, while gold is still the ultimate safe haven asset.
Private markets can also help provide resilience via exposure to different types of assets that are typically more insulated from geopolitical events than listed equities or bonds. Examples include real estate and infrastructure assets that offer resilient long-term cash flows, as well as assets like insurance-linked securities, where weather is the key risk factor.
Overall, we think conditions are favourable for good returns to be made in 2025, but there will be challenges to navigate. A diversified approach, looking across regions and asset classes, can contribute to making portfolios more resilient, no matter what the year ahead brings.
Important Information
For professional investors and advisers only. The material is not suitable for retail clients. We define “Professional Investors” as those who have the appropriate expertise and knowledge e.g. asset managers, distributors and financial intermediaries.
Marketing material
Any reference to sectors/countries/stocks/securities are for illustrative purposes only and not a recommendation to buy or sell any financial instrument/securities or adopt any investment strategy.
Reliance should not be placed on any views or information in the material when taking individual investment and/or strategic decisions.
The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations.
The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of investments to fall as well as rise.
The views and opinions contained herein are those of the individuals to whom they are attributed and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.
Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. This document may contain “forward-looking” information, such as forecasts or projections. Please note that any such information is not a guarantee of any future performance and there is no assurance that any forecast or projection will be realised.
Schroders will be a data controller in respect of your personal data. For information on how Schroders might process your personal data, please view our Privacy Policy available at www.schroders.com/en/privacy-policy/ or on request should you not have access to this webpage.
For your security, communications may be recorded or monitored.
Issued in November 2024 by Schroders Investment Management Ltd registration number: 01893220 (Incorporated in England and Wales) is authorised and regulated in the UK by the Financial Conduct Authority and an authorised financial services provider in South Africa FSP No: 48998.
