A second consecutive year of strong equity returns…
Global equities are on track for a second consecutive year of double-digit returns, based on the total GBP return of the MSCI All Countries World Index. * Valuations rose during 2024, but the rally has also been driven by fundamentals. Earnings for companies in the index are on track to rise by almost 10%, global growth is set to exceed 2.5%, and interest rates in most major markets have been falling. President-elect Donald Trump is adding to the feelgood factor, at least in the US. Tax cuts and deregulation should boost US growth in 2025 and 2026, but they could also mean that inflation remains above target for longer than previously expected. Other aspects of Trump’s political agenda, including tariffs and deportation of undocumented immigrants, could prove even more inflationary, even if they are only partially enacted.
…and lacklustre returns from bonds
Concerns about inflation are being reflected in bond markets. As investors started to anticipate Trump’s victory, US treasury prices fell (and yields rose), with this trend continuing after the election. US bond markets have since stabilised, as investors have taken comfort from Trump’s nominations for key economic posts. Unlike some of his other cabinet picks, his choices for Treasury Secretary and chair of the National Economic Council have been regarded as safe hands. However, there is still some concern about Trump’s approach towards the Federal Reserve. During his campaign, he repeatedly said that the president should have a greater say over monetary policy. Since then, Trump has said that he will not remove Federal Reserve chair Jerome Powell before the end of his term (in May 2026) but the independence of the Federal Reserve may remain a flashpoint in markets over the coming years.
A more challenging outlook outside the US
The outlook for China is one key uncertainty for 2025. On their own, the monetary stimulus measures announced in late September are unlikely to restore confidence in the economy. Schroders’ economists estimate that fiscal support equivalent to 4- 5% of GDP is still required to stabilise the property markets and boost consumer confidence and spending. Having delayed decisive action for so long, Beijing may want to get a better sense of Trump’s plans before unveiling its own measures. Germany may also be moving towards a more ambitious growth agenda, depending on the outcome of February’s election. Friedrich Merz, who could well become Germany’s next Chancellor, has said that he would consider increasing borrowing for long-term investment, helping drive the DAX index to record highs. However, not all countries are getting their houses in order as the international environment becomes more challenging. In both France and South Korea, political instability comes at a difficult time.
Positioning
The strong performance of equities in recent months leaves us slightly overweight the asset class compared to our long-term strategic targets. We are comfortable with this position, given our view that growth remains robust. Trump’s plans to cut taxes and regulation should also boost US growth in 2025 and 2026. However, given the high degree of uncertainty about US policy in a range of areas, we are prepared for higher volatility. We currently have a neutral stance on fixed income, given more attractive opportunities in equities and uncertainty about the outlook for interest rates. As in 2024, we will take advantage of tactical opportunities as rate expectations evolve. We remain underweight alternatives, which look relatively less attractive in today’s interest rate environment. Having said this, we still like alternatives that can provide inflation protection, including commodities and gold.
Key
🟢 Positive
🔵 Positive/Neutral
⚪ Neutral
🟠 Negative/Neutral
🔴 Negative
Outlook
| Economics | US growth remains robust. The consumer is in good shape and labour markets are cooling rather than collapsing, whilst business sentiment is improving.The outlook for Europe and EM is more challenging. Europe’s manufacturing sector faces headwinds, whilst China is struggling to reignite domestic demand.Headline inflation has fallen significantly, but core inflation is likely to remain above central bank targets in the near term. Risk is to the upside for the UK, Europe and US.Market expectations for interest rates are close to fair, with 2025 likely to mark the end of this easing cycle. Central banks may also start to diverge more from each other. |
| Valuations | US mega cap equities remain expensive based on traditional metrics, but fundamentals are strong. Most other regions look fair value vs history, but expensive vs cash and bonds.Earnings growth estimates remain positive and negative revisions have slowed. Earnings strength is expected to broaden out beyond US mega cap growth next year.Credit spreads – the difference in yields relative to government bonds – have largely retraced August’s widening and remain tight (expensive) relative to history. |
| Sentiment | Sentiment towards US equity markets remains positive. Market breadth has widened beyond mega cap growth with US small/mid-caps in favour post-election.The continued rally has kept US markets looking overbought, with the divergence vs non-US markets growing further.Non-US markets have lost momentum and been mostly weaker over the last few months.Volatility (based on US stocks) has fallen to 3-month lows, well below long-term averages. |
| Risks | A resurgence in inflation, which would warrant continued hawkish central bank policy.Labour market weakness could challenge the developed market growth outlook. Potential spillover effects from slowing growth in China on the global economy.Escalation in geopolitical tensions, e.g. Middle East, Russia/Ukraine, US/China.Mounting levels of government debt, particularly in the US, pose a longer-term risk.Tariffs under a Trump presidency could pose further challenges to global growth.Political instability. |
Asset Classes
| Asset classes | Current positioning | Current views |
| Equities | 🔵 | The outlook has improved, in part due to greater US political certainty, and supports an overweight position. Benign growth coupled with falling interest rates should be good for equities, whilst Trump’s pro-growth agenda should be positive for US firms in the near-term. Earnings remain reasonable, particularly for the US and Japan. US mega cap valuations are expensive vs history (albeit with strong fundamentals) whilst other regions and smaller US companies are fair. |
| Bonds | ⚪ | Although central banks are cutting interest rates, government bond yields look attractive relative to the last decade. Given the recent increase in market interest rate expectations (now close to fair value), we have taken profits and increased duration closer to neutral. After a run of strong performance, we have also reduced our emerging market debt exposure. Across the credit spectrum spreads look tight (expensive), so we prefer more defensive positioning such as asset backed securities and short duration, high-quality credit. |
| Alternatives | 🟠 | Select alternatives continue to offer diversification in a potentially volatile environment, albeit with a higher hurdle given yields available on bonds and cash. We favour assets with the ability to deliver less correlated returns to traditional markets and those which hedge against risk scenarios, such as gold and other commodities. |
| Cash | ⚪ | Although some central banks have started reducing interest rates, they remain attractive relative to recent history. Additionally, cash allows us to take advantage of tactical opportunities in potentially volatile markets. |
Equities
| Asset | Current positioning | Current views |
| Equities | 🔵 | The outlook has improved, in part due to greater US political certainty, and supports an overweight position. Benign growth coupled with falling interest rates should be good for equities, whilst Trump’s pro-growth agenda should be positive for US firms in the near-term. Earnings remain reasonable, particularly for the US and Japan. US mega cap valuations are expensive vs history (albeit with strong fundamentals) whilst other regions and smaller US companies are fair. |
| US | ⚪ | Domestic growth remains robust and the election result is supportive, as corporate tax cuts and deregulation will be beneficial for many firms (particularly domestic firms). Inflation has fallen closer to target, but the imposition of tariffs poses a risk. Valuations still look expensive, but this is concentrated in the mega caps and these companies typically have stronger fundamentals. Market performance has been broadening, which is typically a healthy sign. |
| Europe | 🟠 | Consumer confidence has fallen, whilst manufacturing remains weak. Political risk is elevated and rising, whilst proposed tariffs under a Trump presidency are a risk for exporters. Given the risks, favour targeted exposure rather than broad market. |
| Japan | 🔵 | Japanese earnings are robust, beating expectations and delivering growth, whilst valuations are now below historical averages. Sharp yen moves have created market volatility, however monetary policy is expected to normalise slowly alongside signs of sustained inflation and wage growth. Corporate governance reforms are accelerating and remain supportive. |
| Asia/ Emerging markets | ⚪ | In China, weak domestic consumption and troubles in the property sector have led to a deterioration in economic data. Stimulus measures are likely not yet sufficient to reignite domestic consumption. Tariffs under a Trump presidency could also cause further headwinds to the Chinese economy. However, sentiment is at lows and valuations are cheap. Elsewhere, growth prospects look more robust but remain highly dependent on the global cycle, whilst valuations are reasonable. |
| UK | 🔵 | The UK outlook is improving, although an uptick in business and consumer confidence has been stalled by the UK budget. Headline inflation has returned to target, but stronger demand may add to inflation. This is likely to prevent the Bank of England from cutting interest rates much further. Valuations are cheap, unlike most other developed markets. |
Bonds
| Asset | Current positioning | Current views |
| Bonds | ⚪ | Although central banks are cutting interest rates, government bond yields look attractive relative to the last decade. Given the recent increase in market interest rate expectations (now close to fair value), we have taken profits and increased duration closer to neutral. After a run of strong performance, we have also reduced our emerging market debt exposure. Across the credit spectrum spreads look tight (expensive), so we prefer more defensive positioning such as asset backed securities and short duration, high-quality credit. |
| Government bonds | ⚪ | Yields remain attractive relative to the last decade but remain cautious that investors are not being paid well, relative to history, to extend duration, particularly in the US or Europe. Whilst market expectations for interest rate cuts are currently close to fair for the UK and US, they still look excessive for Europe. Uncertainty around US government borrowing and central bank independence also poses a risk to US yields. |
| Credit | 🟠 | Absolute yields continue to look attractive, but spreads are less supportive at current levels. We prefer shorter-duration and higher-quality (investment grade) corporate credit, as well as higher quality asset backed securities where we feel relative valuations are attractive given the strength of the consumer. |
| Inflation-linked | ⚪ | Many developed market real yields remain in positive territory; however, market inflation expectations have moved higher. Whilst we expect inflation to exceed central bank targets, this is now priced into bond markets and so we have reduced exposure to inflation linked bonds. |
| Emerging markets | ⚪ | Emerging market growth prospects look relatively robust compared to developed markets. While developed market central banks are cutting interest rates (generally a positive for emerging markets), this is already priced into markets. Given their recent strong run, valuations now look elevated vs history. |
Alternatives and cash
| Asset | Current positioning | Current views |
| Alternatives | 🟠 | Select alternatives continue to offer diversification in a potentially volatile environment, albeit with a higher hurdle given yields available on bonds and cash. We favour assets with the ability to deliver less correlated returns to traditional markets and those which hedge against risk scenarios, such as gold and other commodities. |
| Absolute Return | 🔴 | Select opportunities in equity long/short and trend following strategies given diversification characteristics. However, government bonds are now looking more attractively valued and may provide a better source of portfolio diversification over the medium term. |
| Liquid private real assets | ⚪ | Long-dated revenue streams and income characteristics remain attractive in select parts of the market. We see good opportunities in renewables, infrastructure, specialist property and exposure to private companies. Valuations are more attractive following recent market volatility. Falling rates are supportive for the sector. |
| Commodities | 🔵 | Broad commodities can hedge against further disruption to energy markets, although areas of the asset class are sensitive to slowing economic growth, particularly in China. Increasing demand from infrastructure spend and energy independence goals could support metal prices against a backdrop of tight supply. |
| Gold | 🟢 | Gold should act as a hedge against growth or inflation shocks, as well as a further escalation in geopolitical tensions. Central bank buying is a long-term support, as is weakness in China’s property market, but strong performance over the last year may result in temporary pullbacks. |
Terms
Spread: the difference in yield between a non-government and government fixed income security.
Duration: approximate percentage change in the price of a bond for a 1% change in yield.
This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.
This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements.
All data contained within this document is sourced from Cazenove Capital unless otherwise stated.
This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
