Something old, something new, something borrowed, nothing blue

(MENAFN- Golin MENA) UAE - Dubai, 20 December 2024
As the end of the year approaches, we present our annual investment outlook for 2025.
Interest rate cuts will continue, corporate earnings remain strong
The change of a calendar year doesn’t mean much for the development of the economic cycle. The trend of moderate global growth, lower inflation and lower interest rates from 2024 will continue into 2025. This will allow central banks to continue lowering interest rates, with the pace driven by new macroeconomic data points. As long as rates remain relatively high compared to recent history, corporations on average will weigh new investments carefully and focus on delivering returns for shareholders. Hence, earnings growth is expected to be strong again in 2025, with 15% average growth projected for the S&P 500 Index and 7.5% for the European STOXX 600 Index. This outlook makes us optimistic for equities and other risky assets in general. However, we remain cautious due to historically high valuations, particularly for US stocks.
Trump, Tariffs, and trade war
The one thing that stands out as different in the new year is Donald Trump returning to the White House on January 20, 2025, as the 47th President of the United States. As long as he keeps advocating that “tariff is the most beautiful word in the dictionary,” US government policies may shift on many economic agenda topics. Higher tariffs may slow down global growth, bring back inflation, and eventually even lead to supply chain disruptions as other regions may be forced to focus on their own economies first. However, should Trump live up to his proclaimed reputation as a dealmaker, the growth outlook could quickly change in a positive direction. Investors will have to deal with uncertainty until new policies have been firmly set by the new government.
Ever-rising government debt
The world has become accustomed to living on borrowed money. Bond investors, in particular, will closely monitor the development of government debt on both sides of the Atlantic and demand higher returns if they feel that balance sheets are not being managed responsibly. Higher-for-longer interest rates in the US will keep the US dollar stronger-for-longer, adversely affecting Europe, Japan, India, and many emerging economies. In Europe, investors will be looking for renewed economic growth, potentially putting pressure on yields in politically troubled France and Germany to see if Draghi’s “whatever it takes” to protect the euro is still valid. Expectations for bond returns remain depressed as long as uncertainty prevails.
Red sweep will determine structural investment themes
As the Trump-led Republican government controls both chambers of Congress, there will be nothing ‘blue’ (the Democrats’ color) about US government policies for at least the next two years. A unified government means more opportunities for productivity and streamlined decision-making when it comes to legislation. Markets expect higher tariffs, lower taxes, and deregulation to be high on the agenda; however, none of these campaign ideas have been put in writing yet. Things are expected to move quickly because Trump is not new to the White House this time. We anticipate that more structural investment themes in areas such as infrastructure, manufacturing, homebuilding, and technology will become clearer in a couple of months when the direction for US government policies has been set. Given the current strength of the US economy, it is likely that other countries will wait and adapt to a certain extent.
The Musk factor
New in 2025 is the “Musk factor”. Due to his massive investment in the Trump campaign, Elon Musk is closer to power than any businessman in history ever has been. Musk will bring a more libertarian, entrepreneurial spirit to politics. That should work well for increased productivity but will likely also result in more risk, for example, due to deregulation or less balanced budget choices.
Outlook cautiously optimistic
All in all, we believe 2025 will be the third consecutive positive year for equities. Returns may turn out to be less favorable than those in 2023 and 2024 due to already high valuations, particularly for US equities. Massive investments in chips and AI will put the technology sector once again in full focus, not least because it is the number one agenda item in China as well. We believe the trade war will dominate the news, and we will keep a close eye on the development of commodity prices and geopolitical relationships.
Cyclical investment themes will stay around as long as central banks are on a path to loosen monetary policy; however, more structural investment themes will take over during the first half of the year. Bipartisan topics like strengthening infrastructure and local manufacturing capabilities will continue. Sectors like healthcare and renewable energy will experience a power shift as early as January 20, 2025.

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