Introduction
Our 2025 Economic and Markets Outlook offers a forward-looking perspective on the global investment landscape. It is built on extensive research and insights from leading investment analysts, market strategists, and fund managers. By synthesising diverse viewpoints and analysing key trends, we provide a comprehensive overview of what 2025 may hold for investors.
This outlook focuses on critical areas, including:
- Anticipated challenges and headwinds
- Emerging investment themes
- The influence of political, central bank, and economic developments
Through these insights, our clients are equipped with the knowledge needed to confidently navigate the opportunities and challenges of 2025.
Our expectations per quarter for 2025
Q1 (January through March)
Inauguration of Donald Trump as President of the USA (and presumptive ‘leader of the free world’); starts imposing tariffs – unevenly. Will exert influence on regional conflicts early in the term. We anticipate considerable market volatility during this quarter as the effects of tariffs on various trading partner supplies take effect. With stabilised environments, countries in conflict will return to ‘normalisation’ and contribute to global economic growth.
We anticipate at least one 25 basis point reduction in interest rates by the US Federal Reserve. Our own RBA is likely to hold out during this Quarter – and maintain current rates. In Australia, the election campaign for the Federal Government will intensify. Posturing by the major parties will see some uncertainty in Australian financial markets. The AUD is likely to hold in the low 60-UScent range for the Quarter.
Jostling to gain favour with the US and other economic leaders like China, India and Europe should increase global trade. Net overall, it is unlikely to have a significant impact on productivity or profitability. Expect this Quarter to end near the value it was at the start of the year.
Q2 (April through June)
Progress toward peace between Russia and Ukraine, and in the Middle East, will have an impact on this quarter’s outcomes. Presuming at least some progress has been made (and that no new economically significant conflicts arise), and –
- that any tariff impositions by the Trump Administration have been resolved, and
- recession concerns abate,
this should be a less volatile Quarter that should record some growth in economic activity – and market prices.
The Quarter includes the notoriously weak month of May. The US Federal Reserve may reduce interest rates by one quarter of one per cent during its meeting in May. At the same time, the Fed may herald that it will pause on reductions at that point.
The Australian Federal Election will have been resolved by the end of this Quarter. Any market weakness from that arena should resolve and market trading normality resumed. Unless there is a surprise outcome that inflation has weakened, we anticipate the RBA will hold rates steady this Quarter.
Q3 (July through September)
The further the year progresses, the more difficult it becomes to form a view as to likely events. We need to rely on historic events as a guide – and there are a few for this Quarter. Of particular note is the Summer holiday period for the New York traders. We expect August – and perhaps September – to be a bit ‘prickly’ and may be a negative growth Quarter this year. The US Fed may make its last interest rate cut for the year – its September meeting.
This may also be the Quarter that sees the RBA commence its easing of interest rates. That will be dependent on both, levels of unemployment, and on inflation, in making that call.
We anticipate this to be a good Quarter for the US, Asia, the UK, and probably Europe. Absent any new conflicts globally, of course.
Q4 (October through December)
The final Quarter each Calendar Year is boosted by annual rebalancing (that also happens to a lesser extent at other quarter-ends) but this often results in market price rises for the companies that persist in the various indices. We believe that there is reason to believe that the year should end up from its opening, by high single-digit increase – and for some assets, by allow double-digit percentage increase.
By the start of this Quarter, the Trump tariffs should be well understood, the numerous elections for this cycle should be over, and ‘normal service’ should resume in economies and on the markets.
We don’t anticipate any interest rate moves by either the US Fed, or the RBA for this Quarter.
Our trusted researchers and analysts have published Outlooks –
Morningstar:
First, a quote – “Through forty years of independent research, Morningstar researchers have seen countless investing fashions come and go and asset prices rise and fall. What has remained constant throughout is the psychological challenge of investing and the patience required to be successful. As we enter a new year, we have no doubt that investors will be faced with booms, panics, scandals, and crises. We are equally confident that investing in high-quality assets at attractive prices will continue to deliver financial security for patient investors long after the specific events of 2025 become a distant memory.”
T.RowePrice:
The global economy is likely heading for a growth slowdown in the first few months of 2025 but a manufacturing led recovery in the second half of the year is highly plausible – although the precise timing of any such rebound is harder to call… as fiscal tailwinds fade, the world is beginning to feel the impact of these hikes – and will continue to do so in the first few months of 2025.
…the recovery is likely to hasten the ongoing transition to manufacturing led growth…we have identified three key drivers of this: first, the release of pent up demand for interest rate sensitive goods consumption; second, a surge in infrastructure spending to meet the global push toward renewable energy and the rise of generative artificial intelligence; and third, the growing trend of companies choosing to shift their manufacturing bases to “friendlier” countries to ease supply chain concerns. Some of these transitions will be longer-term, but evidence of their emergence should start to appear during 2025.
JPMAM:
The global economy is entering 2025 with decent momentum, inflation is declining, thus enabling central banks to ease restrictive monetary policy. Historically, a US economic soft landing and monetary policy easing have helped equities and fixed income to outperform cash (represented by short-term US Treasuries). We believe this is (currently) the most likely scenario.
Our takeaways from the 2025 outlooks these firms have published are presented under the topics of –
- Investment Headwinds
- Investment Themes
- Artificial Intelligence (AI)
- Portfolio Diversification – and
- Investment Outlook
Investment Headwinds –
Key takeaways
- Inflation and geopolitical risks continue to be significant challenges.
- Valuations and economic slowdowns pose risks to equity markets.
- Diversification, fixed-income investments, and prudent optimism are important for managing the uncertainties of 2025.
The detail
Geopolitical Risks: Geopolitical tensions and supply chain reshoring may affect inflation and interest rates. Consequential government debt levels could lead to spending adjustments or tax changes.
Rich Equity Valuations: US equities, particularly large-cap tech stocks, are considered overvalued. Returns could be impacted if high expectations are not met.
Growth Challenges and Recession Risks: While a US recession is not anticipated, it remains possible. Global growth may slow, especially if China’s economy weakens, affecting regions differently. Europe may be more susceptible due to its export dependency.
Central Bank Policies: Global monetary policies differ by region. The US Federal Reserve may maintain higher rates than expected. The European Central Bank and the Bank of Japan will deal with various local and global pressures. Higher yields could benefit fixed-income assets.
Strong US Dollar: A strong USD supports demand for US Treasury bonds, but this may weaken if China’s stimulus increases demand for Asian currencies.
Trade and Industrial Policies: Increased tariffs or trade tensions, particularly with China, could disrupt supply chains and increase costs for essential goods.
Labor Market and Inflation Dynamics: Restrictive immigration policies might tighten labor supply, raising wages and influencing inflation. Job creation may reduce, highlighting productivity improvements.
AI and Capital Allocation Risks: Significant spending in AI and potential regulatory actions present risks to growth projections in this sector.
Broader Economic Concerns: Ongoing inflation, fiscal discipline challenges, and unemployment from unforeseen shocks raise the risk of recession. A less globalised economy could become less efficient and incur higher costs.
Outlook for Bonds and Income Investments: High-yield bonds and bank loans could offer better income generation if rates remain elevated.
Investment Themes –
Key Takeaways
- Private assets offer diversification but come with liquidity risks.
- Australian super funds serve as a model for incorporating private investments successfully.
- Global sectors such as AI and health care are anticipated to feature positively.
- Fixed income and tangible assets will continue to be important for portfolio strategies.
The detail
Convergence of Public and Private Markets: The integration of public and private markets is being driven by new investment products and an emphasis on private credit over equity.
Liquidity Challenges: The main issue with private assets is their lack of liquidity, which makes incorporating them into retail products more difficult.
Lessons from Australian Superannuation Funds: Australian super funds have shown that blending private and public assets, particularly in infrastructure and property investments, can be successful.
Diverse Private Asset Landscape: Private assets are more varied than public assets, presenting unique opportunities – and risks – for investors.
Rising Demand for Tangible Assets: Increased demand for tangible assets is anticipated to support value-oriented sectors such as industrials, energy, and materials in the U.S.
Broadening Global Opportunities: International markets, especially value and small-cap stocks, are expected to offer expanded investment opportunities.
Fixed Income Opportunities: High-yield bonds, bank loans, and emerging market bonds are positioned to generate significant income in 2025.
Demand for Complex Credit Solutions: Economic challenges are increasing the need for bespoke credit solutions, further integrating private markets into investment portfolios.
M&A Activity and IPO Potential: The Federal Reserve’s rate-cutting cycle may create favorable conditions for mergers, acquisitions, and firms going public.
Health Care Innovation: Advancements in treatments and technologies could lead to significant developments in the health care sector.
AI Investment Opportunities: The AI capital expenditure boom is expanding opportunities, benefiting both value and growth sectors across all market capitalisations.
Global Fixed Income Allocation: Diverse monetary policy cycles present opportunities in global fixed income, with some strong local bonds potentially outperforming U.S. Treasuries in certain markets.
AI Investment –
Key Takeaways
- AI commercialisation will focus on integrating technology into services and products.
- Investors should look at companies using AI to boost productivity and efficiency.
- The semiconductor and software sectors are key investment areas.
- Established tech firms can handle AI growth but need long-term patience.
The detail
Shift in AI Focus: The emphasis in AI investment is anticipated to move from hardware and infrastructure towards enterprises that are leveraging AI for revenue growth.
Impact on Corporations: Companies integrating AI into their products and services are likely to experience enhanced productivity, improved margins, and increased competitiveness. In contrast, companies that do not keep pace may face financial setbacks.
Multiyear AI Investment Cycle: The initial phase of rapid AI growth is concluding, giving way to a period characterized by continued yet moderated growth.
AI Use in Financial Services: The adoption of AI in financial advisory services remains selective, with clients approving certain applications while rejecting others.
Key Beneficiaries of AI Advancements: Industries such as semiconductor manufacturing, software development, data infrastructure provision, vertical application vendors, and cybersecurity firms are positioned to benefit significantly from advances in AI.
Role of Tech Giants: Major technology corporations like Microsoft, Meta, Amazon, Oracle, and Alphabet dominate AI workloads due to their significant capital investments.
Software Firms with Strong Potential: Some undervalued software companies, which have not initially reaped the benefits of AI, show strong prospects for growth.
Long-Term AI Returns: The returns on capital expenditures in AI could take several years to materialize, but they are underpinned by robust cash flows.
Portfolio Diversification –
Key Takeaways
- Diversification should prioritise risk management and adaptability to economic conditions.
- Exploring global opportunities, especially in Asia, AI, and alternative assets, is crucial for portfolio resilience in 2025.
- Active management and a thorough understanding of asset behaviors are essential for navigating market volatility.
The detail
Income-Focused Portfolios: Income-focused portfolios require risk management and diversification, focusing on assets that protect against market volatility.
Diversification Beyond Asset Spread: Effective diversification involves understanding how assets perform in different environments, not just spreading investments widely.
Geopolitical Risks and Bonds: Short- to intermediate-term government bonds are suggested over long-dated bonds to manage inflation and fiscal risks.
Rich Equity Valuations and Global Opportunities: Investors may consider underappreciated areas such as US small- and mid-cap stocks, Chinese technology firms, and European consumer cyclicals.
Recession-Proofing with Bonds: High-quality government bonds are viewed as reliable for reducing equity risk and maintaining portfolio stability during downturns.
Private Investment Caution: Private equity and debt do not inherently mitigate volatility risks, as they remain linked to equity and debt markets.
Asian Growth Potential: Improved economic momentum in Asia, particularly China, presents opportunities in equities with strong fundamentals and profit margins.
India’s Diversification Opportunities: India’s regulatory focus on new sectors, consumer discretionary, and disruptive businesses enhances its economic growth prospects.
AI-Driven Diversification: AI investments span data centers, energy systems, semiconductors, and infrastructure, with opportunities across the US, Japan, and Asia.
Reducing Mega-Cap Tech Dependence: Diversifying from US mega-cap tech stocks is considered important, with AI-related investments offering broader market exposure.
Geographic and Asset Class Diversification: Broad global diversification and active stock selection are seen as crucial for building resilient portfolios in uncertain markets.
Alternative Assets for Stability: Private real estate, infrastructure, and transport provide stable income streams and low correlation with public markets.
Fixed Income Strategy: Extending fixed income portfolio durations involves analyzing monetary policy shifts and potential rate cuts in response to weaker growth.
Markets Outlook –
The detail
US Market Opportunities: Despite elevated valuations, there are still compelling investment prospects within the US as well as in other global markets, including Europe and China.
Global Market Outlook: Europe, particularly the UK, is viewed as the most attractive developed market, while China presents good value despite facing structural challenges.
Interest Rates and Bonds: The decline in interest rates diminishes the appeal of holding cash; thus, shorter-dated bonds, high-quality credit, and emerging market bonds should be considered for income purposes.
AI Investment Focus: The commercialisation of artificial intelligence is anticipated to drive corporate innovation and growth, offering long-term investment opportunities across various industries.
Economic Transition Opportunities: A manufacturing-led recovery, underpinned by fiscal and monetary policies, is expected in the latter half of 2025.
International Stock Market Gains: Value and small-cap stocks, particularly in Japan and South Korea, are likely to benefit from global economic expansion.
Private Market Opportunities: An economically challenging environment, coupled with rate cuts, is projected to create opportunities for private market investments.
Sector-Specific Growth: US financials and health care sectors, along with emerging market bonds, are well-positioned for growth amid supportive monetary policies.
European Recovery Outlook: Easing inflation and accelerated ECB rate cuts are expected to bolster manufacturing and consumer spending in Europe.
US Economic Stability: The US economy is anticipated to avoid a recession, driven by improving productivity and supportive fiscal measures.
Global Economic Expansion: Global growth should favor equities, credit, and risk assets, supported by personal consumption and business investment.
Japanese Equities: A weakened yen, linked to US economic performance, could enhance Japanese stock performance in 2025.
Diversification Imperatives: Broader sector participation, fueled by technological growth and reduced index-level risks, endorse a balanced investment strategy.
AI’s Long-Term Potential: Artificial intelligence remains an early-stage opportunity, offering sustained growth potential across diverse markets.
Looking for some personal guidance –
The experienced adviser team at Continuum Financial Planners are available to assist you to –
- interpret the investment outlook and
- review your portfolio.
Annual reviews are useful tools to ensure your long-term goals remain on target. To make an appointment with one of our team –
- phone our office on 07-3421 3456; or
- at your convenience, use our linked Make A Booking facility.
(This article was first posted by us in January 2025.)