Outlook 2025 Cautious optimism in the face of economic and monetary normalisation

At the end of 2024, the world appeared to be at a crossroads, with a return to economic and monetary normality on the one hand, and geopolitical turbulence on the other. A generally robust and resilient global economy has allowed central banks to ease their monetary policies, a trend that should continue, especially in the eurozone.

The geopolitical landscape adds another layer of complexity. Tensions are building around trade wars, armed conflict, and the global race to fight climate change - all of which have implications for financial markets. The outcome of the US elections adds to this dynamic and could reshape the global economy in unpredictable ways.

While uncertainties abound, the underlying strength of the global economy and the proactive measures being taken by policymakers provide a basis for cautious optimism for 2025. Investors need to maintain a balance between carefully assessed risks and opportunities.

Dichotomy between Europe and the USA

Many aspects of global economic activity look set to continue into 2025. These include persistent US consumer growth and relative weakness in Europe, although rising real incomes should provide positive momentum alongside continuing interest-rate cuts. LGT expects moderately positive GDP growth in Europe with inflation staying below its 2 % target and a slightly heightened risk of recession.

Political issues will dominate the agenda. In particular, the potential impact of new US policies - a "Trumponomics 2.0" - is unclear, and increases the expected volatility in growth and inflation forecasts. For the USA, the political shift should open up growth opportunities in the short term, but also carries significant risks in the longer term, with a sharp rise in debt and resurgent inflation.

An opportunity to diversify equity portfolios

Global equity markets will be building on a year of solid price performance, led by an exceptional display put on by the S&P 500 benchmark. The USA is likely to achieve stronger economic growth than Europe, creating better conditions for more broad-based earnings growth. In the past few years, some of the US tech giants have dominated both the market capitalisation of the S&P 500 and the earnings map.

LGT believes that the high concentration of value in a small number of US stocks has its limits. With the "Magnificent Seven" currently accounting for one-third of the market capitalisation in the USA, and the USA itself representing 81 % of the global technology sector, simply buying the market presents specific risks at the moment. This unusual situation creates room for rotations into other, less pricey sectors, and the opportunity for active stock selection. Numerous opportunities exist to diversify US equity portfolios more broadly into non-tech sectors and small- to mid-cap segments.

Finding opportunities in shorter-dated bonds and gold

With the prospect of US inflation rising when the new Trump administration takes power, it is likely that the short end of the US yield curve will fall further as policy rates are cut, although more gradually than previously thought. European rates are likely to be cut at a faster rate in the wake of a weaker economic environment. 

For bond investors this means that euro-denominated bonds should benefit, while shorter-dated US corporate bonds may see some pickup in the short term. Longer-term prospects for these bonds could be hampered by an uncertain economic situation.

Gold continues to entice those investors seeking an alternative to the US dollar. The recent rally in gold prices has been fuelled by BRICS+ nations, which have been pushing for de-dollarisation of the world economy. However, this effort faces significant internal challenges as BRICS+ ambitions are fractured due to a lack of cohesion in their geopolitical interests. (BRICS+ is a global bloc that has expanded beyond the original five nations: Brazil, Russia, India, China and South Africa, to include Iran and Saudia Arabia, among others.)

Caution on trade wars and tariffs

Trade wars are likely to escalate, although to what extent depends in part on the ability of President Trump to make good on his tariff promises. Even before the US election, companies were seeking to gain more control of their supply chains, and were shifting operations onshore to reduce their dependence on countries like China. The impact of tariffs and other measures by the US government is difficult to estimate, but could result in additional headwinds for investors in both the euro area and China.

In the face of this level of uncertainty, investors will need to keep a cool head. This strategy proved effective in 2024 for those who stayed invested despite numerous swings in sentiment and a challenging investment environment. Going forward, it is essential to stay informed and adaptable, ready to seize the opportunities that lie ahead in 2025.