Philip Saunders, Director, and Sahil Mahtani, Head of Macro Research for the Ninety One Investment Institute, explore where the smart capital will be heading and where the pitfalls lie.
With the US performing strongly and China showing signs of turning a corner, a global economic recovery is building. There are abundant opportunities for investors, but 2025 requires a new investment playbook.
Macro: US will grow above trend; China has turned a corner
In 2025, the US is expected to deliver above-trend growth despite significant challenges, including high government debt at 126% of GDP and unsustainable fiscal spending at 6.4% of GDP. Consumer spending, driven by income growth rather than debt, remains sustainable and offsets weakness in the manufacturing sector. Companies are addressing labour shortages by increasing capital investment, and productivity growth has continued at a healthy pace. Supply-driven growth is expected to continue, and though inflation may rise in the medium to long term, it should recede this year. The new Trump administration’s pro-business policies could impact growth positively, though it is too early to assess.
In China, President Xi’s policy actions aim to stabilise the economy, boost growth, and improve consumer and business sentiment. China’s “new economy” sectors, including electric vehicles and renewable energy, are expanding rapidly, showcasing its rise up the value chain. However, the continuing property sector bust, and deleveraging have kept output and credit growth weak. As local authority financing is unblocked and sentiment improves, we expect China to achieve its growth target for the year.
Interest rates and bonds: Expect synchronised rate reductions and steeper yield curves
“Policy rates remained elevated in 2024, exerting downward pressure on growth and inflation, and indeed inflation fell significantly despite ‘stickier’ periods. Economic growth stayed stable, and labour markets loosened due to increased supply rather than layoffs. For next year, the key call is inflation and if, as we expect, inflation will continue to trend lower, then central banks will continue to cut rates in a synchronized manner to support growth,” said Saunders.
Currently, US yields remain high due to uncertainty over future rate cuts and the long-term neutral rate. The Federal Reserve thinks the neutral rate is around 3%, but the market anticipates it at under 4%, raising concerns about overly stimulative policy. Fiscal policy under the new US administration could boost nominal growth but also raise term premia if deficits continue. Trade policy remains unclear, with uncertain impacts on growth and inflation, dependent on tariffs and retaliation. Ultimately, outside a weaker growth environment, yield curves will likely steepen in response to rate cuts, with limited scope for long-term bonds to rally.
Mahtani added: “The ECB’s neutral rate projections of 2-3% are likely too high, given structural growth challenges. Europe’s reliance on global trade and potential protectionism risks could prompt aggressive rate cuts below 2% in 2025, benefiting European bonds. Economic effects of lower rates will likely be more pronounced in the second half of 2025.”
Credit: Opportunities in specialised segments and Europe; some credit markets look expensive
Saunders remarked. “Credit markets are currently experiencing a tug-of-war between attractive all-in yields and tight spreads. The yield component has prevailed, with sustained inflows into the asset class, despite investment-grade and high-yield spreads being at multi-decade lows. Strong credit fundamentals support these markets, but unprecedented demand has driven spread compression.”
Given the constrained valuations in traditional US investment-grade and high-yield debt, opportunities are greater in specialised credit segments. Structured credit, especially collateralised loan obligation (CLO) mezzanine tranches, is attractively priced compared to corporates. Agency mortgage-backed securities (MBS) also offer compelling relative value compared to investment-grade corporates and some high-yield segments. Agency MBS spreads remain near historical wides, driven by a weak technical backdrop and elevated rate uncertainty, which is expected to normalise this year. Additionally, leveraged loans are favoured over high-yield due to their higher carry, even accounting for potential rate cuts.
Regionally, Europe offers more compelling opportunities, with spreads across asset classes significantly wider than in the US. The focus is on defensive sectors, given the region’s weaker growth outlook. The banking sector has outperformed and is expected to continue doing so in 2025, though at a slower pace.
“With historically tight credit spreads, a disciplined approach to single-name selection and dynamic positioning is essential to navigate upcoming challenges and opportunities,” Mahtani highlighted.
Emerging markets fixed income: Headwinds, but EM fixed income could outperform expectations
Emerging markets fixed income (EMFI) has shown resilience despite challenges. Since 2022, emerging economies have outperformed expectations, with central banks tightening rates and achieving similar inflation to developed markets. Countries like Brazil, Peru, and India have benefited from Chinese commodity demand. However, the outlook is more complex. Trump’s policies may lead to higher US growth and inflation, limiting the Federal Reserve’s ability to ease, which could strengthen the US dollar, a potential headwind for emerging markets. Significant pessimism is already priced in, particularly in Asian currencies.
“The biggest risk for EMFI is tariffs, due to their impact on trade- dependent EM economies. While tariffs could raise US inflation, the Fed may overlook this short-term impact. Although tariffs might harm growth in targeted EM countries, selective investment could mitigate this. A stable US yield curve, driven by strong growth without major fiscal stimulus, would benefit EM assets,” stated Saunders.
Other macro factors include China’s potential growth exceeding expectations with fiscal easing and resolving conflicts in the Middle East and Ukraine/Russia, which could lower oil prices and support global consumer spending. Countries like India and Turkey, with high export ratios, are likely to benefit, while others, like the Czech Republic, could suffer.
EM hard currency debt remains attractive with tightening spreads. Despite challenges from a stronger dollar, high real policy rates in EMs provide room for easing. In South Africa, the new coalition government formed in June 2024 could boost growth, though challenges persist. With expected yields of around 10.3%, South African bonds could offer a total return of about 11% by December 2025.
Developed markets equities: Look beyond last year’s winners in a more challenging year for US large-cap stocks
US exceptionalism continued in 2024, with US stock-market returns significantly exceeding those of most other markets, and the US dollar strengthening against major currencies. Investor sentiment and equity allocations reached cycle highs, with price-to-earnings multiples around 25x for historic earnings and 22x for forward earnings. However, the market is top-heavy, with the 10 largest companies making up over 35% of the total market, a concentration not seen since the 1970s. The US equity market now represents 75% of the MSCI World Index and 67% of the MSCI World All Countries Index.
“The outperformance of the US, and US mega-cap tech stocks in particular, has been driven primarily by fundamentals. The Magnificent 7 delivered a remarkable 16% annual revenue growth over the last decade, while the average company in the MSCI USA Index saw 6% revenue growth, naturally raising questions about the sustainability of such concentrated growth,” explained Mahtani.
While US macro prospects look promising, much of the positive news may already be priced in, suggesting 2025 could be more challenging for large-cap US equities. As global conditions improve, investors should consider trimming strategic allocations to large-cap growth stocks and the US market, which now scores poorly in long-term return estimates.
“Opportunities exist in sectors like financials, which offer momentum and reasonable valuations, and in value and small-cap stocks, which provide diversification and exposure to broader earnings growth,” Saunders added.
Emerging markets equities: Mixed macro backdrop, but an abundance of bottom-up opportunities
Emerging Market (EM) equities have a positive outlook for three key reasons: falling US interest rates, continued US economic growth, and attractive valuations compared to developed markets, especially the US. Historically, falling US rates and strong US growth have been positive for EM equities. However, Trump’s victory introduces uncertainty, particularly with his tariff policies targeting China, Mexico, and Canada.”
China, despite facing US tariffs, has diversified its export markets, reducing reliance on the US from 20% in 2012 to 13% in 2023. China’s recent efforts to stabilise its economy and property market, alongside improving corporate operations and increasing shareholder returns, offer strong stock-picking opportunities. Meanwhile, Asia is emerging as the ‘AI factory to the world,’ with AI-driven technology sectors benefiting from global demand, especially semiconductors and data centres.
Saunders said: “India and the Middle East are richly valued but show transformative growth, particularly in workforce participation in Saudi Arabia and economic inclusion in India. Despite challenges in markets like Brazil and Mexico, which face regulatory and economic hurdles, there are abundant bottom-up opportunities in EMs.”
In South Africa, lower inflation and interest rates provide a positive outlook for banks, insurers, and retail, with the potential for GDP growth to surpass 2% in the medium term, benefiting SA equities.
Commodities
Brent crude oil prices peaked above US$100 per barrel after Russia’s 2022 invasion of Ukraine but have since declined, tempered by OPEC’s production controls that prevented a steeper drop. Natural gas prices followed a similar but more extreme trend. The lagged impact of weaker energy prices should support recovery, with risks remaining to the downside.
Mahtani said: “We forecast Brent at around US$70/bbl for the year ahead. The energy-friendly Trump administration is likely to improve supply, supporting low inflation growth. A relaxation of US regulations and the resumption of LNG approvals could boost the US midstream production sector, with continued M&A activity.”
Industrial metal prices peaked in 2022 but have since traded sideways despite weak demand, indicating tight supply. This creates a positive backdrop for the mining sector, which should benefit from a global recovery driven by capital investment.
Gold was a standout performer in 2024, supported by central bank buying and investor interest due to geopolitical uncertainties and fiscal risks. While gold is expected to remain in a long-term bull cycle, a period of consolidation appears likely. This could benefit gold-mining stocks, which have underperformed due to cost pressures. With weaker energy prices reducing costs, strong cashflows from gold-mining stocks are likely to attract investor interest.
Currencies
Expectations of US dollar weakness in 2024 were disrupted as the currency strengthened from October, driven by resilient US growth compared to weaker data from Europe and China. The Bank of Japan remained cautious about raising rates despite inflationary pressures. Trump’s victory added support to the dollar, with potential tariff increases in the first half of the year.
“Looking ahead, the outlook for currency markets remains uncertain, with the US dollar starting from an expensive point. The US exceptionalism theme is likely to dominate in the first half, supporting the dollar. However, one of Trump’s goals is to weaken the dollar to enhance US competitiveness, possibly through bilateral negotiations, similar to the Plaza Accord of 1985. In the second half, a global recovery could lead to improved returns on assets in other currencies, reducing the dollar’s dominance,” Saunders noted.
Thematic trends
Investors should be very cognisant of the potential impact of the new Cold War between America and China on global markets. The rise of China has challenged the existing ‘rules-based order,’ leading to a ‘crisis of global integration.’
Mahtani stated: “My old professor Charlie Maier identified three 20th century crises: of representation, of capitalism, and of industrial society. We’ve extended his analytical framework to the current period, calling the 2020s a crisis of global integration, which revolves around the challenges of a global trading system and an increasingly global polity that is stumbling towards a new settlement. The continuing conflicts in Ukraine and the Middle East are part of a broader geo-economic struggle between the US, China, and their proxies.”
This shift has been described as ‘de-globalisation,’ contributing to stagnating global trade, as economies of scale decline and capital flows are restricted. However, concerns about de-globalisation may be misplaced—what is happening is instead reglobalisation along different lines. In fact, strategic competition between nations can drive capital investment, and trade may continue to thrive in a multipolar system.
“While the reconfiguration of global supply chains could raise costs and inflation due to increased focus on strategic resilience, the global economy’s adaptability should not be underestimated. The outcome of this geopolitical shift could still support robust trade and investment, despite the challenges presented by shifting global dynamics,” Mahtani said.
For more details, read the full outlook or listen to the podcast here.
