As we enter 2025, HSBC Asset Management (HSBC AM) believes that the “soft landing” of lower inflation and resilient growth has materialized which should allow central bankers to continue with further policy easing and create a broadly supportive backdrop for risk assets in 2025.
However, uncertainty around economic and trade policy has risen. An environment of rising policy uncertainty typically goes hand-in-hand with higher volatility across investment markets and elevated geopolitical tensions and fiscal policy activism could disrupt investors’ assumptions about growth, profits, or inflation in 2025. This creates a risk of stickier inflation and shallower interest rate cutting cycles.
Investors should expect market rotations in 2025 in our view, which means it will be important to be active and agile. A “broadening out” of stocks can continue, with laggard sectors and factor styles likely to outperform. Fixed income is currently offering income for investors, but shallow rate cuts would likely force investors to think more broadly about portfolio diversification. Here, we believe private markets can play an important role. Private credit continues to offer good “all in” yields and provides a way for investors to side-step public market volatility. Hedge Funds also remain another good source of portfolio diversification. Emerging and Frontier markets may be vulnerable to rising uncertainty around trade policies and a stronger US dollar however, they remain under-loved by investors while being attractively priced. As a result, we see good selective opportunities in EM stocks and bonds.
Macro in motion
We believe the macro economy is in motion, and we think cross-country growth rates are coming together in 2025. For the US, this means that the recent period of “US exceptionalism” could fade, however we see little risk of an economic downturn in the next 6-12 months. Meanwhile, Europe is recovering from the cost-of-living shock but we expect GDP and profits growth will pick-up in the Euro zone and the UK. However, the world’s premium growth rates will likely be in Asia and in Frontier economies. In China, ongoing policy support should ensure that the economic slowdown is less significant than many forecasters fear. We anticipate India will be the fastest growing large economy in the world and see improving macro fundamentals in South East Asia and in MENA in 2025.
But it is not a stretch to say that we live in unpredictable times. One of the most significant consequences for investors will be a move to a more volatile inflation regime, with interest rates settling at a higher level than in the 2010s. This new paradigm reflects a number of ongoing, structural changes, including the end of hyper globalisation and the move to a more fragmented, multi-polar world. Meanwhile, Europe is at an interesting juncture, with the manufacturing sector facing stiff competition from China, an ongoing productivity problem, and public finance pressures coming up against populist political backlashes. And, in China, all eyes will be on further policy initiatives, as policy makers build out the so-called “three arrows” framework of liquidity injections, fiscal and credit policy easing, and longer-run economic reforms.
Xavier Baraton, Global Chief Investment Officer, HSBC Asset Management:
“The global economic landscape is undergoing significant shifts, with evolving growth dynamics, structurally higher inflation, and geopolitical uncertainty shaping our outlook for the near term. While the growth outlook for the US economy remains robust, we anticipate a gradual broadening out as other regions, particularly Asia, take on a more prominent role in driving global growth. Inflationary pressures are set to become more entrenched and central banks may face difficult decisions ahead, balancing the need for economic support against the risk of fueling inflation further. In this dynamic environment, investors must remain alert to both opportunities and vulnerabilities, adapting strategies to address an increasingly complex global economic framework.”
Portfolio rotations
We believe stock markets can still deliver reasonable returns for investors in 2025, but we think it will be important to look beyond recent winners. New developments in AI could have profound effects on the economy, but the dramatic rise in tech valuations in 2024 leaves the sector vulnerable to any disappointing profits news in 2025. With the US economy still in good shape, we are positioned for a “broadening out” in market trends, and the potential for laggard sectors and equity factors to catch-up. We also expect profits growth to be more evenly distributed across the global economy over the next twelve months. This supports a case for international stocks, with our preferred allocations being Japan, Asia ex Japan, and Frontier Markets. Here, the scenario for the US dollar should be an important driver of investor returns. That means, at least for the start of 2025, a granular and selective approach in emerging markets makes sense.
In fixed income, our scenario of a shallow cutting cycle from the Fed in 2025, plus more issuance of Treasury bonds, is likely to put upward pressure on long term yields. Outside of a “hard landing” materialising, we find it difficult to see a big move lower in yields. Meanwhile, things look different in Europe, with pronounced growth risks, falling inflation, and a more dovish ECB. These factors support the investment case for euro duration assets. Shorter duration credits, like asset backed securities, are interesting at this juncture, due to their floating rate nature and portfolio diversification characteristics.
Joseph Little, Global Chief Strategist, HSBC Asset Management:
“A big story in 2024 has been the quick-shifting narratives in investment markets. The macro debate has spun between ‘inflation is over’, to ‘no landing’, to ‘growth concerns’, and back again. For investors, it has at times felt dizzying. But rapid changes in the market narrative are likely to be a feature of the system again in 2025. One reason for this is that policy uncertainty is now rising. Meanwhile, macro uncertainty remains elevated, with many key economic questions remaining unanswered as we head into the new year. That means that noise levels in financial markets are likely to be high in 2025, and investors should prepare for rising market volatility. Staying active and nimble with portfolio positioning will be important. As will opportunities in private markets, where investors can side-step higher public market volatility.”
Building portfolio resilience with alternatives
With unpredictability set to remain a core theme for markets in the next twelve months, alternatives can offer investors a valuable source of diversification and resilience. Despite falling interest rates, demand for private credit has remained robust, partly due to rates being unlikely to return to the very low levels seen in the last decade, leaving room for private credit to deliver an attractive all-in yield. With private credit still only accounting for 6% of US corporate lending, we see considerable potential for future growth in 2025.
Private equity markets have suffered from a weaker exit environment but there are signs that deal activity is recovering. We see opportunities emerging in the lower-mid market, which we believe is supported by reasonable valuations, solid company fundamentals, and the potential for a wider range of future exit opportunities. Several long-term trends also present opportunities for private equity investors, including the energy transition, on-shoring or near-shoring of supply chains, and the emergence of artificial intelligence.
In real estate, market sentiment has improved as the outlook for interest rates clears. Europe is well placed to lead an investment recovery due to limited development activity, values having reset relatively quickly, and interest rates beginning to fall. Private real estate capital markets are showing signs of reopening now while recent deal activity in the listed real estate market also points to rising confidence.
Joanna Munro, Chief Executive Officer, HSBC Alternatives, HSBC Asset Management:
“As markets continue to navigate persistent volatility in 2025, alternative investments are emerging as a critical avenue for diversifying and strengthening portfolios. Private credit continues to attract strong demand, even amidst declining interest rates, and we believe the sector’s growth trajectory is poised to accelerate, offering significant opportunities for investors in the months ahead. Private equity, despite recent headwinds, is showing signs of a recovery in transaction activity. We see opportunities within the lower mid-market segment, with transformative trends continuing to create compelling long-term opportunities. The real estate sector also offers promise, while rising confidence in private and listed real estate markets reflects growing optimism, as well as improving economic conditions. With greater macro and market volatility associated with elevated geo-political risk, we are constructive on the opportunity set for hedge funds for the next year.”
