Summary
- Strong momentum in US, Japanese, German stocks: the S&P 500, Nikkei 225 and DAX stock indices all returned 3%-6% over the last 2 months of 2024, completing strong 2023-24 gains. We remain positive on stocks globally, with the US and Japan our preferred regions.
- More central bank rate cuts due in 2025: weakening economic activity underline the need for central banks to cut benchmark rates further in 2025, led by the ECB in Europe. Interest rate markets now expect the ECB deposit rate to fall below 2% (our 12-month target) by end-2025.
- Higher US bond yields give income opportunities: the US 10-year bond yield has risen 0.9% since mid-September to 4.5% today. With US economic momentum faltering, buying longer-dated US bonds is more attractive. Favour US investment-grade credit, US agency bonds.
- Momentum in selected commodities: despite persistent US dollar strength over Q4 2024, commodities have held up well, led by gold, natural gas, coffee and cocoa. After a strong 2024, gold remains one of our favoured diversifying assets for 2025, with 13% upside to our USD 3000/ounce 12-month target.
- Risks – US retail investor euphoria? Retail positioning in US stocks is extended, judged by sentiment indices and the record aggregate US household positioning in US stocks. For now, momentum favours continued stock exposure, but we watch for any deterioration in earnings.
Difficult to expect a repeat of 2023-24 greatest hits
An ongoing bull market does not mean stellar 2025 returns in prospect
Since September 2022 when this latest stock bull market kicked off, European, Japanese and US indices have returned between 55% and 70% cumulatively to date in local currency (22%-27% annualised). The MSCI All-Country World Index (ACWI) has rewarded investors to the tune of 23% annualised in US dollars over this period, even including the weaker performance from emerging markets.
But after more than 2 years of exceptionally strong stock market performance, it is unreasonable to expect stocks to perform as well for a third year in succession. When looking at long-running bull markets of the past, the third year often marks a pause in stock performance, with modest returns. So, we should not expect 2025 to necessarily follow the same playbook as the previous two years.
Investors should keep in mind that US retail investor optimism is already somewhat euphoric, judging by a host of positioning and sentiment indicators. Valuations of large-cap US stocks have expanded substantially to reach historically high levels (21.6x forward P/E). In fact, this multiple expansion in US large-cap stocks (from 15.5x to 21.6x) has been the principal driver of the US market’s 2-year returns.
Hence, we retain a modest outlook on stock returns for the 12 months ahead, expecting single-digit returns for global stocks.
The best bond market has been China!
In a context where major central banks (ex Japan) are cutting benchmark interest rates in a more-or-less coordinated fashion, it is surprising to see that US 10-year Treasury bond yields have risen sharply since September, since when the Federal Reserve has reduced its benchmark rate by 1%. Even in Europe where the growth dynamic is much weaker, long-term sovereign yields have hardly fallen since June 2024 when the European Central Bank began to cut its deposit rate (by 1% to 3% currently).
It is then little surprise to see that US Treasury bond returns have been poor since September (-4%), while euro area government bonds have managed a meagre 1% including coupons. Contrast this with the impressive performance of Chinese sovereign bonds in renminbi, +7% over 2024. While Chinese stocks and real estate may have suffered since 2021, the risk of deflation has allowed the Chinese 10-year bond yield to ease below US and German yields to just 1.6%.
In fact, emerging market sovereign bonds overall remain relatively strong performers in US dollars, shielded from the strong US dollar, gaining 7% including coupons since the start of 2024.
Key messages
Expect modest returns from stocks this year, as further multiple expansion is unlikely. Post the steepening of the US yield curve, lengthen duration in US Treasuries Favour US and euro investment-grade credit, US agency bonds.
Divergent consumer and industrial economic trends
Consumption-related activity robust, industrial and investment trends still poor
The global economy remains in a two-speed mode: on the one hand, consumers have clearly spent reasonably over the holiday period, sustaining steady growth in services activity (led by strong US household spending). According to credit card company Mastercard in their Spending Pulse survey, US holiday retail sales grew 3.8% year-on-year for the period 1 November – 24 December, a robust performance supported by a healthy labour market and household wealth gains.
But in contrast, industrial activity globally remains weak, with the S&P/JP Morgan global manufacturing PMI ending 2024 below the breakeven 50 level, signalling a mild contraction led by weakness in the US, UK and the eurozone.
Lower short- and long-term interest rates are needed to incentivise greater business investment and new construction activity, while continued uncertainty over the incoming Trump administration’s policy objectives delay US business investment in key sectors such as clean energy and building.
Overall, the leading economic indicator index for the G20 group of nations continues to rise, according to the OECD. This improving trend, combined with the expectation of lower interest rates over H1 2025, suggests that global economic momentum should improve sooner rather than later.
Lower energy prices could be a surprising positive for 2025 global growth
Global oil and gas prices remain key to global growth, given continued energy demand growth from developing nations. The International Energy Agency (IEA) forecasts global electricity demand to grow by 4% in 2025 on the back of the global electrification trend, supplied partly by greater production of renewable energy but also via increased use of natural gas, including Liquefied Natural Gas (LNG).
US and European natural gas prices have risen steadily in 2024, but oil prices should ease from the current USD 76/barrel for the Brent benchmark towards our forecast USD 60-70/barrel range this year, given the likely continued increase in supply from both OPEC+ and non-OPEC producers. Should lower energy prices materialise in the coming months, we could see a positive impact both on global growth and inflation, after the 2022 energy price shock.
We forecast positive returns from both precious and industrial metals in 2025, following on from a largely positive 2024. We focus on gold, silver, copper and tin, given strong global demand and emerging supply deficits in each of these metals.
Key messages
We continue to advise investment in commodities as a key diversification strategy. After a strong 2024, gold remains one of our favoured commodities for 2025, with 13% upside to our USD 3000/ounce 12-month target.
Four investment trends to stick with in 2025
European financials outperform the broader market
Improving bank lending trends are helping European banks to deliver earnings growth. Financial services (including wealth management, stock exchanges, broker/dealers) benefit from ongoing strength in financial markets and robust trading volumes.
Low-volatility hedge fund strategies deliver
Investors who seek funds with a low correlation to stock and bond markets should consider market-neutral (“long/short”) equity and credit hedge and alternative UCITS funds. They have delivered returns (to end-November) well in excess of long-only bonds and credit at low annualised volatility.
US listed infrastructure exposure
US energy and electricity infrastructure development themes performed strongly last year but remain a key focus for us in 2025 given the ongoing need for investment to satisfy energy demand growth.
Precious metals, enhanced commodity strategies
Gold and silver should do well again in 2025, particularly if the US dollar and bond yields see any reversal in near-term momentum after a sharp rise since October 2024. For more diversified commodities exposure including industrial metals, consider enhanced roll strategies that aim to extract a “roll yield” from commodities in backwardation (where far-dated futures prices are lower than spot prices).
Global Chief Investment Officer