Invesco 2025 Investment Strategy

Macro and Strategic Context

The 2025 investment landscape is entering a transformative period marked by:

• Easing Inflation: Central banks, having curtailed inflation effectively, are transitioning toward rate cuts, fostering growth.
• Soft Landing: Economic deceleration gives way to reacceleration through 2025, providing a supportive environment for risk assets.
• Geopolitical Dynamics: Trade policies, energy transitions, and technological advancements are reshaping global economic linkages.

This framework underscores the necessity for diversified portfolios, tactical adjustments, and sector-specific allocations.

Key Macro Themes

1. Soft Landing with Growth Recovery
   • Global Outlook:
     • Growth is expected to decelerate to trend levels in early 2025 before gaining momentum, bolstered by easing monetary policies and wage growth.

1. Regional Highlights:
   • US: Resilient labor markets and easing financial conditions underpin a robust recovery.
   • Europe: Central bank rate cuts and moderate real wage growth are expected to drive cyclical recoveries.
   • Japan: Wage increases and corporate profitability improvements fuel domestic demand.
   • China: Policy pivots aim to restore domestic confidence, with potential spillover effects on regional growth.
2. Emerging Markets (EMs):
   • Benefit from global rate cuts, weaker USD, and stronger commodity prices. India and parts of Southeast Asia are standout performers.
3. Easing Monetary Policies
   • Rate Cuts Across Major Economies:
     • Fed and ECB are forecast to continue easing through 2025, while Japan embarks on modest tightening due to inflation normalization.
   • Impact on Financial Conditions:
     • Rate cuts lower borrowing costs, stimulate credit expansion, and improve risk appetite, setting a positive tone for equities and credit.

1. Favorable Risk Sentiment
   • Historically, easing cycles that avoid recessions have seen strong returns in equities, commodities, and credit.
   • Value and small-cap stocks are well-positioned to benefit from the steepening yield curve and broader market participation.

Equity Opportunities

1. US Equities
   • Small-Cap Stocks:
     • Earnings growth prospects improve as rate cuts alleviate refinancing burdens.
     • Small-cap stocks, which have faced revenue stagnation, are poised for renewed growth.

1. Value-Oriented Sectors:
   • Reduced discount rates support undervalued sectors like financials, industrials, and energy.
2. Cyclicals and Growth:
   • Steeper yield curves favor cyclicals, while growth sectors such as technology remain structurally strong.
3. Non-US Developed Markets
   • Europe:
     • Recovery driven by favorable valuations, cyclical sector weightings, and improving domestic demand.
   • Japan:
     • Wage growth boosts domestic consumption, while export competitiveness may moderate due to yen appreciation.
4. Emerging Markets
   • China:
     • Policy stimulus focuses on stabilizing housing markets and boosting household spending.
   • India and Southeast Asia:
     • Structural growth, favorable demographics, and increasing capital inflows provide compelling investment opportunities.

Fixed Income Insights

1. Investment-Grade Bonds
   • Rate cuts create tailwinds for longer-duration assets, with attractive yields in investment-grade credit.
   • Corporate bonds, particularly in healthcare and technology sectors, offer favorable risk-adjusted returns.
2. High-Yield Bonds
   • Tight spreads limit upside, but strong fundamentals and liquidity support a cautiously positive stance.
   • Opportunities arise in event-driven credit and structured finance.
3. Emerging Market Debt
   • EM local currency bonds benefit from easing inflation and favorable interest rate differentials.
   • Asian economies, particularly those tied to China’s growth, stand out as beneficiaries.

Alternatives and Real Assets

1. Private Credit
   • Direct lending and infrastructure credit offer enhanced yields relative to traditional fixed income.
   • Hybrid capital solutions emerge as attractive options amid tightening spreads.
2. Private Equity
   • Focus shifts to growth-stage companies in technology, healthcare, and sustainability sectors.
   • Secondary market opportunities and lower valuations create entry points for selective investments.
3. Real Estate
   • Easing rates and declining debt costs restore positive leverage, particularly in commercial real estate.
   • Sustainable real estate (e.g., energy-efficient buildings) aligns with structural trends in ESG investing.
4. Infrastructure
   • Investments in renewable energy, AI-enabled logistics, and urban infrastructure gain traction.
   • Resilience and inflation-hedging characteristics support long-term allocation to this asset class.
5. Commodities
   • Industrial Commodities:
     • Benefit from infrastructure spending and global economic recovery.
   • Gold:
     • Serves as a hedge against geopolitical risks and potential inflationary pressures.

Currencies

1. US Dollar
   • The dollar’s strength is tempered by narrowing interest rate differentials as other central banks cut rates.
   • Commodity-linked currencies and JPY/GBP offer relative strength in a multi-dimensional currency environment.
2. Emerging Market Currencies
   • Appreciation opportunities arise as capital flows return to EMs with favorable growth dynamics.

Risk and Tail Scenarios

1. Policy Risks
   • Overly restrictive fiscal policies or delayed monetary easing could stall recovery momentum.
   • A potential return of inflation driven by supply chain disruptions or energy price shocks remains a concern.
2. Geopolitical Uncertainty
   • Trade tensions, particularly involving the US and China, could disrupt global supply chains and market confidence.
3. China’s Stimulus Efficacy
   • The success of policy measures in reviving growth is a critical swing factor for global sentiment.

Strategic Positioning

Tactical Adjustments (6-12 Months)

• Equities:
  • Overweight non-US developed markets and small-cap value stocks in the US.
  • Select emerging markets like India and Southeast Asia for growth exposure.
• Fixed Income:
  • Emphasize duration overweight in investment-grade bonds.
  • Allocate selectively to high-yield credit.
• Alternatives:
  • Increase allocation to private credit, real estate, and infrastructure.
• Commodities:
  • Favor base metals and gold for cyclical recovery and risk hedging.

Long-Term Allocation

• Diversify portfolios across geographies, asset classes, and themes.
• Incorporate thematic investments in AI, healthcare innovation, and green energy for structural growth.

2025 presents a pivotal opportunity for recalibrating portfolios. The confluence of easing monetary policies, economic recovery, and thematic growth trends supports a risk-on stance. By leveraging diversification, active management, and alternative asset classes, investors can navigate the evolving global landscape while positioning for resilient, long-term returns. Active monitoring of macro and geopolitical risks remains essential for safeguarding portfolio performance.

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