A landmark US election, new stimulus in China, and growing geopolitical tensions mean the second half of the 2020s will be markedly different from what we’ve seen so far. Growth, inflation, and interest rates across the world’s economies are set to head in very different directions over the next 12 months. Investors will need a different playbook.
Divergence in policies, economic performance, and geopolitics present a strong range of opportunities for market participants in 2025, according to Fidelity International’s (“Fidelity”) 2025 investment outlook: The Divergence Dividend.
Fidelity’s Chief Investment Officers (“CIOs”) provide their respective outlooks across equities, fixed income and multi asset. These extracts were taken from Fidelity International’s annual outlook, looking at all major asset classes. You can read the full report here.
Equities – New avenues
Niamh Brodie-Machura, Co-CIO, Equities, Fidelity International
| Top convictions for 2025US stocks will outperform the rest of the developed world on earningsJapanese shares still a strong bet as reforms improve returnsNerves on valuations make the case for income |
“Pound for pound, macro and monetary policy should deliver a positive environment for stock markets going into 2025. The business cycle will enter a new stage – but the year will also see geopolitics resound ever more loudly.
“The trends we have seen dictate recent price moves may have further to run. But we can expect new directions and a broadening of areas of growth in markets. These are exciting times for equity investors.
Regional views
“A landmark Republican election victory is likely to reinforce American exceptionalism. Even before November’s poll, we expected US corporate earnings to increase by 14 per cent in 2025, beating most other regions and the global average in terms of growth, return-on-equity, and the level of net debt. The election has fanned optimism in the market that the coming year will prove pro-business, pro-growth, and pro-innovation. Nevertheless, investors will have to be more discerning in where they look this year.
“Going into 2025, we see sentiment and fundamentals metrics as supportive of Japan. It remains on track for reflation with strong wage growth, and capital expenditure and shareholder returns will increase steadily over time. The percentage of Topix companies outperforming the index has also been on the rise, as investors scout for beneficiaries of the country’s corporate governance reforms.
“One caveat is that a strong yen combined with higher interest rates could hurt earnings later in the year, especially in the consumer discretionary sector, where overseas sales outweigh domestic demand for carmakers and durable goods exporters.
“On the other side of the developed world, there are significant challenges. Recent profit warnings by Europeanindustrial and automobile companies, as well as lacklustre sales by consumer discretionary names, signal that doubts over Chinese demand could weigh heavy on these shares. Our macro team’s modelling also suggests a partial implementation of the tariffs floated by Republicans would knock as much as half a percentage point off German and Eurozone GDP.
“In China itself, we prefer sectors that are already high on the government’s policy agenda: technology, high-end manufacturing, consumer, and healthcare. We’re conscious that Chinese equities can be volatile, and that many companies have rebounded from depressed to fair valuations on the policy pivot. The good news is that there’s no shortage of stocks with clear paths to earnings growth in this massive market.”
Fixed Income – Rates make return journey
Steve Ellis, CIO, Fixed income, Fidelity International
| Top convictions for 2025Defensive US dollar investment grade – to shelter from recession risksGlobal short duration income – to lock in decent all-in yieldsAsian high yield – to capture attractive carry and spreads compression |
“A dominant theme for fixed income markets in 2025 will be where US interest rates find themselves at the end of this rate cycle. Indeed, investors’ estimates of where the terminal rate will trough have proven volatile.
“Any new tariffs are likely to push inflation higher, making a case for the terminal rate ending up above what the market is pricing in at the time of writing (around 3.5 per cent), as does the expected increase in the US fiscal deficit next year.
US recession looks underpriced
“Investors looking for value in fixed income should note that the market struggles to price things like geopolitical risks, which have clear potential to hurt economic growth.
“The recent hiking cycle has also been unusually benign for credit issuers. But at some point, issuers who locked in lower rates will have to refinance, a fact that will weigh increasingly on investors’ and policymakers’ minds as 2025 progresses.
“If US growth does deteriorate over the next 12 months, the Fed may have to cut more aggressively than expected, meaning a lower terminal interest rate. With credit spreads currently tight, there is a risk-reward case for adding US duration with a bias towards holding higher quality credit.
China: waiting for more
“A big focus heading into next year is the timing and extent of China’s stimulus measures, and their potential to boost growth domestically and across the wider region, but also to export inflation.
“Overall, we see a favourable environment for Asian high yield credit, especially if we see continued Fed easing as well as more monetary easing and stimulus from China. Investment grade Asian bonds also look good. The supply of Asian US dollar investment grade bonds has shrunk significantly, while investor demand remains high.”
Multi Asset – Late cycle with a twist
Henk-Jan Rikkerink, Global Head of Solutions and Multi Asset
| Top convictions for 2025For the tactical asset allocator: US mid-caps offer a way to capitalise on the country’s positive earnings momentum while avoiding the higher valuations of the market’s biggest namesFor the income investor: Easing policy and high yields are good news for carry trades. But, given risks posed by US fiscal inflation, we are looking to non-US duration, CLOs (collateralized loan obligation), and short-dated high yield. Inflation-linked treasuries should also offer some protectionFor the thematic investor: A basket of future financials. The 2025 backdrop suits this asset class, and by putting together a basket that is future proof, there is the potential for long-term excess returns tooFor the drawdown-aware investor: Heightened use of options-based strategies make sense as this part of the cycle will increase realised volatility. Diversification and returns should be available through upping absolute return strategies |
“We’ve been here before. It’s normal for markets to act more erratically during the later stages of the cycle. Yet beneath the market’s jitters is a generally positive environment of continued economic expansion in the US, and signs the Chinese government is committed to deploying broad-based stimulus in an attempt to support its economy.
“All this amounts to an encouraging backdrop for risk assets, even if it promises turbulence too. Our message is this: stay invested in equities, seek carry trades, and be prepared to take advantage of market volatility.
“The US’s continued resilience should serve as a tailwind for equities, but there are some areas we particularly like. One is mid-caps. These avoid the higher valuations of big technology giants, while offering decent profits and the chance to benefit from late-cycle reflation.
“Transition materials are also of interest to long-term investors, acting both as a key to decarbonisation efforts and an inflation hedge.
“Elsewhere, selected REITs (real estate investment trusts) have attractive valuations, and our bottom-up research analysts envisage a biotech upswing after a tough few years.
Carry trades
“Easing policy in both the US and China, combined with a contained default environment, creates a positive backdrop for credit and ‘carry trades’.
“There are some high real yields on offer in emerging markets, where investors display much less optimism. We believe several emerging market central banks could move rates lower than markets expect. That means we like high-yielding local debt markets and select EM FX (emerging market foreign exchange), such as Brazil and South Africa.”
