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2025 Macro Outlook: Slower growth amid geopolitical uncertainty, but opportunities remain

William Davies
William Davies
Global Chief Investment Officer

Headwinds are blowing but conditions are supportive, so we see both risks and opportunities in 2025.

With equity markets rising 25% in 2023, there was not really an expectation going into 2024 that we would see a further 20% gain.1 So there has been an extraordinary equity run – particularly in the US. Why? Economic growth in the US has been solid, hovering around 3% year-on-year since the third quarter of 2023, and inflation has steadily decreased from 9% in 2022 to 3% as we entered 2024 and now down to around 2.5%.2 Both these things have been supportive.

In addition, earnings growth forecasts for 2025 in the US remain optimistic, at around 15%. This continued resilience is to some extent a little surprising, because the global economy is not without risks as we move into 2025 …

Headwinds are blowing

The geopolitical dangers we have experienced in 2024 have so far not led to a slowdown. But further escalation of multiple tensions remains a distinct possibility. The war continues in Ukraine, with both sides taking ground and no end in sight. In the Middle East the situation seems to be escalating, despite multiple pleas for a ceasefire. Both of these are human tragedies first and foremost, but it is our job to look beyond this at the economic consequence. Short-term volatility is a real concern, and in the long term the possible re-emergence of inflationary pressures, both of which will impact companies directly.

In the US, we have recently seen a victory for Donald Trump in the race to become President of the United States. We also saw the Republicans gain control of the Senate and the House of Representatives, which will make it easier for them to make their desired changes. This could mean lower taxes (not withstanding tariffs, which could go up) and reduced regulation, and have implications for international trade as we head through 2025.

Economic nationalism is increasingly baked in. Tariffs and sanctions tend to elicit reprisals and have the potential to spiral. This will likely be an important theme in coming years.

Divergence on a downward path

Many global economies suffered the same inflationary shock from 2023 onwards, but we are now seeing diverging approaches to subsequent recovery and economic growth.

The Bank of Japan is an outlier, having raised rates by 25bps in July. Elsewhere, the European Central Bank was the first to move with two 0.5% interest rate cuts. The Bank of England has been more cautious, with a cut-pause-cut approach, as high wage growth remains a concern. And in the US the Federal Reserve started late but did so with an aggressive 50bps cut and followed it up with a further 25bps in November (Figure 1). At the moment it appears it has been able to engineer a “soft landing”, but it’s all eyes on the labour market for signs of persistent weakness.

Figure 1: Rates tracking down … at differing paces

Chart Rates tracking down at differing paces
Source: Bloomberg, as at November 2024

However, with underlying inflation around 2.5% and core inflation closer to 3% in the US (and not far off elsewhere), we don’t expect rates to fall as far as people think – certainly they will be higher than the 2010s (Figure 2). This will have implications for investors and how they position portfolios.

Figure 2: The inflationary shock has subsided … for now

Chart The inflationary shock has subsided for now
Source: Bloomberg, as at November 2024

Risks and opportunities in 2025

A new terminal interest rate means a new environment for companies to navigate. The rate-cutting cycle should create a favourable backdrop for high-quality bonds, but we think credit dispersion will increase in 2025. Balance sheet health across industries is not uniform, with highly leveraged companies particularly within high yield potentially vulnerable.

Equities enjoy a falling rate environment. But the likelihood of rates not returning to previous lows means companies’ capital allocation decisions will be key to successfully navigating this new environment. The US continues to be the most expensive market, trading in excess of 25x forward earnings; by contrast, the MSCI All-country world index ex-US is at 16.30x. That gap is near its widest in more than two decades. But the US also remains the most dynamic market in terms of diversity of companies, with some of the most advanced semiconductor equipment firms and artificial intelligence and generative AI businesses.

At some stage the US will be too expensive, but underperformance is most likely to happen when other areas grow faster. If, for example, Europe grows faster it will look attractive because it is that much cheaper. Do we expect it to do so? No. Elsewhere, China disappointed in 2024 and although we are now seeing that stimulus come through, will it be sufficient to drive sustainable higher economic growth? Coupled with challenges around its demographics and uncertainties over tariffs and global trade, there is some risk there.

Five years out from 2030

The energy transition will continue with further investment in alternative energy likely. But we would also expect that as we get closer to the 2030 deadlines, we will see a further dilution of energy transition targets. There is also the potential for these negotiations to become more political as well as pragmatic, with trade tariffs playing an increasing role.

Deficits: a new year concern

Budget deficits are not a worry until they become a worry – and they ought to become a worry. Major global economies – from the US, the UK and Japan to much of Europe – are running deficits of 5%-6% (despite Europe’s supposed 3% limit). That may be manageable if interest rates are low, but if deficits continue to rise and rates don’t come down as much as expected, financing the deficit becomes increasingly problematic. When this eventually becomes a focus, it will become a market-moving factor.

Bottom line

For equities to continue their exceptional performance we would need geopolitical risks to stabilise; growth, but not too much; steady but low inflation so rates can come down … a lot has to go right. So although we expect gains, we wouldn’t expect a continuation of the 20%-25% growth in the US stock market. Fixed income should start 2025 from a good base: yields are attractive and central banks are engaged in supportive, rate-cutting cycles, but disparities will exist. Stock and credit selection will be paramount.

All market data is Bloomberg as at November 2024 unless otherwise stated

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2025 Macro Outlook: Slower growth amid geopolitical uncertainty, but opportunities remain

1S&P, as at September 2024
2US Federal Reserve, as at 16 October 2024

Important information:

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). This is a marketing document. This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services.

 

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). This is a marketing document. This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services.

 

The NCREIF Property Index (NPI) is a quarterly, unleveraged composite total return for private commercial real estate properties held for investment purposes only.

 

Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. Real estate investing involves risks, including, without limitation: (i) actual operating results; (ii) interest rates; (iii) availability and costs of financing; (iv) economic and market conditions; (v) date of expected exit; (vi) increases in costs of materials or services beyond projections; (vii) force majeure events (e.g., terrorist attacks, extreme weather conditions, earthquakes, war); (viii) supply/demand imbalances; (ix) currency fluctuations; (x) litigation and disputes relating to investments with joint venture partners or third parties; (xi) changes in zoning and other laws; (xii) inability to obtain necessary licenses and permits; (xiii) competition; and (xiv) changes in tax law and tax treatment and disallowance of tax positions.

 

The value of directly-held property reflects the opinion of valuers and is reviewed periodically. These assets can also be illiquid and significant or persistent redemptions may requite the manager to sell properties at a lower market value adversely affecting the value of your investment.

 

The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be appropriate for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either.

 

Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This is a marketing document. This document and its contents have not been reviewed by any regulatory authority.

 

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) and relies on Class Order 03/1102 in respect of the financial services it provides to wholesale clients in Australia. This document should only be distributed in Australia to “wholesale clients” as defined in Section 761G of the Corporations Act. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

 

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

 

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

 

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO)
No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

 

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

 

In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

 

In Switzerland: Issued by Threadneedle Portfolio Services AG, an unregulated Swiss firm or Columbia Threadneedle Management (Swiss) GmbH, acting as representative office of Columbia Threadneedle Management Limited, authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA).

 

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge who meet the regulatory criteria to be classified as a Professional Client or Market Counterparty and no other person should act upon it. This document and its contents and any other information or opinions subsequently supplied or given to you are strictly confidential and for the sole use of those attending the presentation. It may not be reproduced in any form or passed on to any third party without the express written permission of CTIME. By accepting delivery of this presentation, you agree that it is not to be copied or reproduced in whole or in part and that you will not disclose its contents to any other person.

 

Along with Columbia Threadneedle’s in-house Research and Lionstone Research, a variety of sources have been used in the production of this document including, but not exclusively, Oxford Economics, Property Market Analysis, MSCI (www.msci.com/notice-and-disclaimer), Moody’s, CoStar, Federal Reserve Bank of St. Louis.

 

In relation to data and information sourced from or provided by Property Market Analysis LLP, nothing herein expressed or implied is intended or shall be construed to confer upon or give to any person any rights or remedies under or by reason of this document. No third party is entitled to rely on any of the statements and/or information contained in this document, and no entity referred to herein assumes any liability to any third party because of any reliance on the statements and/or information contained in this document.
Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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Important information:

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). This is a marketing document. This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services.

 

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). This is a marketing document. This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services.

 

The NCREIF Property Index (NPI) is a quarterly, unleveraged composite total return for private commercial real estate properties held for investment purposes only.

 

Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. Real estate investing involves risks, including, without limitation: (i) actual operating results; (ii) interest rates; (iii) availability and costs of financing; (iv) economic and market conditions; (v) date of expected exit; (vi) increases in costs of materials or services beyond projections; (vii) force majeure events (e.g., terrorist attacks, extreme weather conditions, earthquakes, war); (viii) supply/demand imbalances; (ix) currency fluctuations; (x) litigation and disputes relating to investments with joint venture partners or third parties; (xi) changes in zoning and other laws; (xii) inability to obtain necessary licenses and permits; (xiii) competition; and (xiv) changes in tax law and tax treatment and disallowance of tax positions.

 

The value of directly-held property reflects the opinion of valuers and is reviewed periodically. These assets can also be illiquid and significant or persistent redemptions may requite the manager to sell properties at a lower market value adversely affecting the value of your investment.

 

The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be appropriate for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either.

 

Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This is a marketing document. This document and its contents have not been reviewed by any regulatory authority.

 

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) and relies on Class Order 03/1102 in respect of the financial services it provides to wholesale clients in Australia. This document should only be distributed in Australia to “wholesale clients” as defined in Section 761G of the Corporations Act. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

 

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

 

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

 

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO)
No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

 

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

 

In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

 

In Switzerland: Issued by Threadneedle Portfolio Services AG, an unregulated Swiss firm or Columbia Threadneedle Management (Swiss) GmbH, acting as representative office of Columbia Threadneedle Management Limited, authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA).

 

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge who meet the regulatory criteria to be classified as a Professional Client or Market Counterparty and no other person should act upon it. This document and its contents and any other information or opinions subsequently supplied or given to you are strictly confidential and for the sole use of those attending the presentation. It may not be reproduced in any form or passed on to any third party without the express written permission of CTIME. By accepting delivery of this presentation, you agree that it is not to be copied or reproduced in whole or in part and that you will not disclose its contents to any other person.

 

Along with Columbia Threadneedle’s in-house Research and Lionstone Research, a variety of sources have been used in the production of this document including, but not exclusively, Oxford Economics, Property Market Analysis, MSCI (www.msci.com/notice-and-disclaimer), Moody’s, CoStar, Federal Reserve Bank of St. Louis.

 

In relation to data and information sourced from or provided by Property Market Analysis LLP, nothing herein expressed or implied is intended or shall be construed to confer upon or give to any person any rights or remedies under or by reason of this document. No third party is entitled to rely on any of the statements and/or information contained in this document, and no entity referred to herein assumes any liability to any third party because of any reliance on the statements and/or information contained in this document.
Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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