Schroders’ Outlook 2025: Equities report provides a comprehensive analysis of the global equity landscape, highlighting key sectors, countries, and themes poised to influence investment strategies in the coming year.
Global Equities Perspective
The report notes that, as of November 2024, the S&P 500 has risen by 25% in USD terms, and the MSCI All-Country World Index has increased by 18%, despite geopolitical tensions and political turmoil. This growth is attributed to strong earnings, particularly in the U.S., and investor optimism for 2025.
Technology Sector Dominance
A significant portion of market gains has been driven by “Mega-Tech” stocks—Meta, Alphabet, Microsoft, Nvidia, Amazon, and Apple—linked to artificial intelligence (AI). Nvidia, for instance, has seen its shares surge over 600% since the launch of ChatGPT in November 2022. However, the substantial capital expenditure in AI by major tech companies raises questions about the sustainability of their dominance, especially if revenue growth does not keep pace with investments.
Valuation Concerns
Global equities are currently expensive, with U.S. markets appearing particularly overvalued. Despite this, valuations may remain supported in the short term due to declining global inflation and anticipated interest rate cuts by central banks, which historically bolster equity markets. Consensus earnings estimates project 8-12% average growth annually over the next two years across key global regions.
Potential Impact of U.S. Policies
The re-election of Donald Trump introduces uncertainties, particularly regarding proposed tariffs on imports, which could act as a regressive tax on U.S. consumers and potentially elevate inflation. Such policies may have significant implications for both the U.S. and global economies.
Australian Equities Outlook
In the Australian context, equity markets have been buoyed by increased money supply, supporting asset prices but not necessarily improving living standards. There is a notable disconnect between company fundamentals and valuations, with sectors like financials and technology experiencing substantial gains, while materials, energy, and consumer staples remain undervalued. This disparity suggests that company valuations are heavily influenced by market sentiment and news, making the timing of a potential return to fundamentals unpredictable.
Investment Implications
Investors should be cognizant of the elevated valuations and the potential for market corrections, especially in sectors with significant capital expenditures like technology. Diversification across sectors and geographies, along with a focus on fundamental value, may be prudent strategies in navigating the 2025 equity landscape.
Fixed income
Schroders’ Outlook 2025: Fixed Income report provides an in-depth analysis of the fixed income landscape, highlighting key factors influencing bond markets and offering strategic insights for investors.
Global Economic Context
As we enter 2025, the global economy is influenced by several factors:
- US Economic Policies: The incoming US administration’s agenda, including stricter immigration controls, relaxed fiscal policies, deregulation, and tariffs on international goods, introduces uncertainties that may impact inflation and economic growth.
- Monetary Policy Shifts: Central banks are adjusting policy rates, with the Federal Reserve’s recent rate cuts leading to realignment in bond yields. This environment presents opportunities for fixed income investments, offering attractive income levels not seen since the 2008 financial crisis.
Fixed Income Market Dynamics
- US Treasury Yields: Ten-year US Treasury nominal yields are expected to remain above 4%, with real yields (adjusted for inflation) exceeding 2%, providing compelling income opportunities for investors.
- Credit Markets: Credit fundamentals are anticipated to stay robust in 2025. Elevated all-in yields and steeper yield curves should continue to attract inflows into credit markets. However, potential policy changes could introduce volatility in corporate bond spreads.
- Emerging Market Debt (EMD): EMD has shown resilience despite challenges such as rising developed market government bond yields and geopolitical instabilities. Continued policy support in emerging markets is essential to maintain this resilience.
Investment Strategies
- Diversification: Increased geopolitical risks and economic uncertainties underscore the importance of diversification across geographies and asset classes to enhance portfolio resilience.
- High-Quality Assets: Focusing on high-quality fixed income assets, such as investment-grade corporate bonds and short-dated securities, can provide stability and attractive income in a potentially volatile environment.
- Active Management: Given the dynamic nature of economic policies and market conditions, active management is crucial to navigate the fixed income landscape effectively, allowing for adjustments in response to policy shifts and market developments.
Conclusion
Schroders’ analysis suggests that, despite potential challenges posed by policy uncertainties and geopolitical risks, the fixed income market in 2025 offers attractive opportunities for income generation and portfolio diversification. Investors are advised to remain vigilant and adaptable, leveraging active management strategies to navigate the evolving landscape.
