How two experts plan to navigate 2025

If 2024 looked complicated, there is also a lot for investors to navigate in 2025. There is Donald Trump 2.0, with tariffs, tax cuts and deregulation on the table. The geopolitical landscape looks increasingly uncomfortable, while elections in Germany could give the far right a seat in government. The major global economies appear to be in better shape, but fears of reviving inflationary pressures remain, while government debt levels give cause for concern.

In the meantime, stock markets remain polarised between the astonishing strength of the US, and the weakness of almost everywhere else. This has flattered the performance of index funds over active funds, and created a dilemma for investors. The bond markets have proved similarly uncertain, with significant shifts in interest rate expectations over the year. At the same time, narrowing credit spreads have left little wiggle room should economic conditions turn south.

At our annual investment dinner, we talked to two of our Elite Rated managers to try and make sense of this environment, and to understand where the opportunities lie in the year ahead.

Ben Edwards, manager of BlackRock Corporate Bond

Across government bond markets, Edwards is looking at three fundamental reasons to invest: valuation, policy certainty, and a catalyst for weakness in the economy. On this basis, he is finding the most compelling value in the UK bond markets.

He says: “In the US, there are great valuations, but not quite as much policy certainty as a few months ago. The economic outlook now appears more pro-growth and pro-inflation. In Europe, there is low growth, but there is also policy uncertainty, and valuations are not compelling, with yields of around 2.25% on 10-year German government bonds.

“Then you have the UK, where all three of these elements are broadly aligned. There is growth that looks more like Europe than the US, and there are yields that look more like the US than Europe, and since the election, there is a lot more policy certainty.”

He points out that 2024 has seen record inflows into bond funds, but most of them have gone into US and European bond markets, while flows into UK bond markets have been anaemic. He adds: “It is worth taking a moment to look at the last time bond yields were at their current level – it was in June last year. At that time, core inflation was 6.8%, the Bank of England hadn’t started cutting rates and the market was pricing three or four extra hikes. Now, core inflation is half that level, the Bank of England has cut rates twice and the market is pricing three interest rate cuts. It is a fundamentally different picture, but the yield on a 10-year gilt is still at a similar level.”

The relative weakness of the UK economy is also likely to be positive for the bond market. Consumer confidence and spending have been relatively weak, though uncertainty around the budget may also have played a role.

“Growth has flatlined in Q3 and is likely to be weak in Q4. The budget was bigger and bolder than many people expected, but was underwhelming in terms of the likelihood that it would create sustainable growth. Short-term investment is about patching up the NHS, schools and policing. All those things need to happen, but they’re not a recipe for an uplift in productivity. At some point next year, my assumption is that the Bank of England will start to focus on the weakening labour market outlook rather than the sticky inflation outlook.”

What’s the catalyst that would bring together attractive valuations, with the weaker economic outlook? Edwards adds: “People buying the asset class, like they have in Europe and the US. The catalyst will be when high cash rates start to disappear.”

Ben Leyland, manager of JOHCM Global Opportunities

As Leyland looks ahead to 2025, he believes Donald Trump is likely to have an outsized impact on how the first half of the year unfolds. It will be increasingly clear how much of his agenda is rhetoric, and how much reality. For global stock markets, his position on tariffs, and whether they are a negotiating ploy or a line in the sand, will be particularly important.

Leyland says that the Trump regime is likely to impose greater self-sufficiency on the rest of the world. This is not new. The Covid pandemic and Russia’s invasion of Ukraine have exposed vulnerabilities across the world and prompted mass restructuring of supply chains. He adds: “Those vulnerabilities arose because of under-investment in infrastructure, particularly in Europe. It made countries dependent on Chinese manufacturing, on fossil fuels from geopolitically unstable parts of the world, and also on the US defence budget.”

He believes this is prompting a swing back to real world companies such as those involved in infrastructure, renewables, materials, utilities or industrials. Trump is unlikely to change this pathway – and may accelerate it. There will be investment in security of supply, in reshoring, and in the automation of factories. There may even be a renaissance for nuclear energy.

Leyland adds: “Even within technology, it’s interesting that the pendulum has moved from social media companies to Nvidia, which is a real world infrastructure company. Building capacity changes the dynamic. At the end of this decade, we’ll be talking about the quality and growth characteristics found in a broader spread of sectors than just the technology sector.”

The impact of Covid is still creating ripples across multiple industries. Its impact has been disruptive and inconsistent. Sectors have come out of sync. He adds: “That means we have to be selective when we talk about the cyclical opportunities we see in front of us. We are relatively contrarian investors. Momentum investors like rising share prices because they see it as proof of concept, whereas value investors worry about rising share prices because it’s eroding their margin of safety. And they like falling share prices because it gives them a greater margin of safety.”

This makes the technology sector difficult, not because the US mega-caps are bad businesses, but because pricing is so high. Leyland sees a more positive outlook over 10 years than over two years. He adds: “It is too simplistic to say therefore it’s going to deliver terrible returns. For me, the question is how much of clients’ wealth do investors want to put there?”

There are still opportunities, he believes, even in the context of a relatively expensive overall equity market. He says: “We find opportunities in disrupted sectors such as industrial and automotive semiconductors. Life sciences should be long-term structural beneficiaries of outsourcing, but have suffered from a destocking cycle. Spirits are long-term, structurally advantaged businesses, even if there are concerns on tariffs. We are much more optimistic about our opportunity set than we were pre-Covid. We see real world companies taking advantage of the drive to self-sufficiency.”