With 2024 the year of elections and approximately 25% of the global population exercising their right to vote, the potential outcomes and a combination of change and uncertainty are still evolving. As the dust settles, Abhi Chatterjee, Chief Investment Strategist at Dynamic Planner, the UK’s leading digital advice platform, has outlined what he expects to play out for markets as the world moves into 2025:
- Government change across 25% of the world means change in macroeconomic policy bringing uncertainty and volatility
- Shifting sands of trade policy between US and China could lead to higher prices as globalisation grinds to a halt hampering growth in export economies
- Two distinct themes: government issuance will see heightened risk; corporates will continue to be buoyant whether fixed income or equities
“Looking forward to 2025, a major source of influence on macroeconomic outcomes will be governments. Elections have taken place around the world, from the US to the UK, India and across Europe, many with shock outcomes. While there are numerous debates underway as to the whys and wherefores of such results, what they ultimately mean for macroeconomic policy in general – and more so for markets – is change. Change brings uncertainty, and along with uncertainty comes volatility.
“A primary concern for markets has been growth. Most of the developed market economies are in the doldrums. The manufacturing heart of the eurozone, Germany, has shown lacklustre growth on the back of sluggish exports, with energy shortages also playing a part. France and the UK remain in the same boat, with a moderate uptick expected in 2025.
“The growth engines in emerging markets, especially Asia, should see better prospects on the back of stronger domestic demand. The only clear bright spot globally remains the United States, where the economy has been humming along due to major fiscal policies enacted by the incumbent government. Should this remain the base case globally, we should expect modest growth, helped by easing inflation. However, changes in the political landscape raise significant risks to this scenario.
“Given the above, we expect the government sector to be the most affected. This includes issuances by government. The increasing budget deficits required for investments in infrastructure as well as social programmes mean government borrowing is expected to increase, raising concerns about the ability to service the increased debt burden. Thus 2025 is likely to bring greater volatility in government bond markets.
“The outlook on inflation also feeds into this. The combination of prospects for more protectionist US policy and China’s struggles could lead to possibly significant trade disruptions, which will invariably lead to higher prices as globalisation grinds to a halt. This could hamper growth in economies that export to the US – primarily Europe and China – as well as causing rates to stay higher for longer and producing tighter monetary conditions.
“The corporate sector seems to be in a healthier position. Earnings across regions have been strong, especially in the US, while Europe has strength in some sectors. As rates have started to come down, 2024 has become one of the busiest years for corporate bond issuance, and the trend is expected to continue in 2025. Should the Trump administration be supportive of corporates through tax cuts and reduced regulation, the US corporate sector will be in a favourable position. In Europe, there are likely to be sectoral winners and losers given the slowdown in China, a critical market for European companies. An unknown is the impact of future US policies, which could adversely impact both companies that trade with the US and the global economy as a whole.
“One sector expected to experience secular growth is infrastructure. Spending on capital projects has begun to rebound and is expected to accelerate significantly, with global spending forecast to increase to around USD 9 trillion for 2025. The World Economic Forum estimates that every dollar spent on a capital project (in utilities, energy, transport, waste management, flood defence and telecommunications) generates an economic return of between 5% and 25%. With government debt burdens increasing, private investors will be called on to do more, with the significant backing of governments.
“Looking forward, there seem to be two distinct themes – one each for the government and the corporate sector. Governments, through their policies and deficits, can significantly alter the macroeconomic landscape, but until the policies and their impact become clear, government issuance will see heightened risk. For now, safety may have to be sought elsewhere, rather than in this major “risk-off” asset. Corporate fixed income is likely to be a beneficiary, although strong corporate earnings are reflected in tighter spreads. Equity remains the asset of choice, on balance, given the policies expected to be enacted. But it would be unreasonable to expect the rising tide to lift all boats. More dispersion means this is an analysts’ market, in which research on sectors and names has the potential to provide better risk-adjusted outcomes.”
