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We live in a world characterised by rapid and accelerating change: economic, social, political and technological. Change, in all its forms, is often unsettling but cannot be ignored. It will create challenges in 2025 and beyond, but also investment opportunities. This annual outlook discusses where they are likely to be.
Change is happening against quite a challenging economic backdrop. 2025 will not be a year of rapid GDP growth: U.S. growth is forecast at a modest 2.0%, with the Eurozone lagging some way behind (0.9%) and Chinese growth (4.2%) well below recent historical averages. Inflation could also prove tenacious, due to higher fiscal spending and possible tariff hikes. This, in turn, will give central banks less room to cut interest rates as they seek to balance growth and inflation control. The result may well be uncertain and shifting market expectations, triggering more bouts of volatility than in 2024. Geopolitical fallout, perhaps due to changing trade policy, could add to the uncertainty.
So why am I broadly positive about the investment outlook for 2025? The key word is “productivity”.
Productivity (i.e. what output we can produce with given inputs) appears to have increased only very slowly in recent years, and on some related measures (e.g. real GDP per hour worked) may have fallen. This has had major economic and social costs. As Nobel Laureate Paul Krugman famously observed thirty years ago, “productivity isn‘t everything, but in the long run, it is almost everything”. Krugman was reflecting the views of many economists when he argued that long-term gains in standards of living were dependent on raising output per worker. Thirty years on, as worker numbers fall relative to overall populations, raising output per worker seems even more urgent. The good news is that AI and associated technologies now offer a credible way to do this. We will publish more on this structural issue of productivity – and its important implications for capital markets – early next year.
Productivity gains will take time to accumulate, of course – this will be a process that continues and deepens considerably beyond the necessarily limited time horizon of this 2025 outlook. But market expectations on productivity are already having an impact on several of the 2025 investment themes discussed in this report. Remember, after all, that the value of a financial asset will not just reflect the present: it also (imperfectly) anticipates the future.
For the global economy, we think 2025 will be a case of staying the course in turbulent times. The ability of individual economies to weather possible geopolitical and policy challenges next year will be determined by a number of factors. But, as the growth numbers highlighted above show, there is already a distinction between a high technology, higher productivity U.S. economy and a European economy that is lagging behind on the interlinked issues of productivity and investment.
On politics & policy, we think that the future is fiscal. Even though inflation is not fully tamed, the focus of policy is already moving from monetary to fiscal, as economies seek to find and drive new forms of development and growth. Expect further initiatives here, notably from China.
Our asset class themes for 2025, unsurprisingly, include several on stocks. For those investors who have the ability to take risks, these will be an effective way to be invested in growth and we see them as the key to portfolio success. As we discuss, there will be several reasons why, for stocks, the U.S. will remain the centre of gravity. These include expectations around rising profits, deregulation and tax relief. Elsewhere, the outlook for equities may be less vivid but is still generally bright: the outlook also explains why positives are still apparent for some European stocks despite relative domestic economic weakness, and the same is true for other regions.
The market focus on stocks should not preclude interest in other asset classes in 2025. Corporate bonds in the U.S., Asia and Europe, for example, are likely to remain interesting for investors for several reasons. These include institutional demand, still high yields and the return of the (term) premium. Supply and demand will remain fundamental to commodities such as oil and industrial metals but we also see other factors maintaining a relatively high price for gold in 2025. In alternative assets, we focus in this outlook on infrastructure – central to investing in future growth – and what we call the public and private mixology of investing in this area. FX considerations will, as always, be a central consideration for investors and here 2025 will clearly be a case of strong economy, strong currency for the U.S. dollar. The euro will look weak in comparison, but rate rises and growth could support the Japanese yen.
2025 will not always be an easy year for investors as markets navigate through geopolitical or other risks (including the “three Rs” of recession, rates and rotations). But we believe that these risks are manageable. With markets already anticipating the impact of future economic growth and development, this means that being and staying invested will be essential for portfolio success both in the short and long term. I hope you find the analysis in this annual outlook useful and we are, of course, always here to guide you through 2025 and beyond.
Christian Nolting
Global CIO
