Macro and Market Outlook
A Wider Scope
Macroeconomic Outlook
While the year started with debates around a "soft landing", 2024 proved to be closer to "no landing" as global growth remained robust and inflation broadly fell. Global growth was driven by the US, amid strength in the consumer and broader services sector. European growth improved, although it remained sluggish, while China activity disappointed amid continued property market woes and more subdued consumer and business confidence.
Looking forward, this backdrop is set to give way to a base case of slower, but positive, global growth. The moderate slowdown masks a divergence across regions given expected US actions on tariffs, fiscal policy, immigration and deregulation. While the broad direction of US policy appears clear, the exact timing and scale of measures is still unknown, opening a wider range of outcomes across all regions. Fiscal and monetary policy impetus may yet support growth outside the US, thus supporting a healthy 2025 global growth outturn.
US
We expect the US to continue to outperform. The benefits from reduced corporate taxes, extensions of tax cuts under the Tax Cuts and Jobs Act and the unleashing of ‘animal spirits’ from greater deregulation should offset any drag from higher tariffs and stricter enforcement of immigration rules. Longer term, tariffs might encourage the reshoring of production to America leading to job creation and increased economic activity.
Inflation poses a potential tail risk in that there could be renewed upward pressure from increased tariffs, looser fiscal policy and wage pressures from tighter labour markets as immigration policy reduces labour supply. As a result, the Fed may be reluctant to aggressively loosen policy. Indeed, Chair Powell said in November that the central bank need not “be in a hurry to lower rates” given current economic strength.
China
China will undoubtedly face headwinds from higher US tariffs, given the proposed tariffs of 60% on all exports to the US which could reduce growth by around 2% points. Consensus projects GDP growth will slow from 5% in 2024 to around 4% in 2025, based partly on a more probable tariff level well below 60%. Likely policy offsets include additional stimulus, currency devaluation and rerouting exports via other countries.
Europe
Europe is also at risk, given the scale of its trade surplus with the US. A 10% increase in US tariffs could lower growth by 0.3-0.5% to around 0.8% next year. Inflation in Europe faces downside risks due to the growth shock from tariffs, which suggests the ECB might be in more of a “hurry” than the Fed to cut rates in 2025. Expectations for the terminal ECB deposit rate have already been lowered to 1.5/1.75%, from 3.25% at present. Offsets could come via more voter-friendly fiscal policies being implemented. The upcoming German election in February may result in an easing of the ‘debt brake’ rule, which would provide space for much-needed fiscal support.
Asset Class Outlook
The macro backdrop and the theme of divergence will impact asset classes in different ways, including:
- Equities: Divergence within regional equity performance is set to remain a feature as US outperformance continues with tax cuts and deregulation adding to existing structural competitive advantages. While initial tariff proposals by Trump might be high, our base case assumes negotiations will result in less severe US tariffs than suggested during the election campaign, leading to only a moderate slowdown in the global economy. This potentially provides upside of high single digits in global equities in 2025.
- Fixed income: The incoming US administration are set to lean towards higher growth policies, while tariffs could limit European growth. With divergent growth outlooks, the neutral rate is likely much lower in Europe, whereas the stronger US economy means the Fed may need to ease policy by less. Ongoing disinflation suggests central banks can continue to cut rates, especially in the Eurozone, which should support bond returns.
- Alternatives: Our alternatives allocation has exposures to multiple economies, strategy types and return drivers. As we enter a period of potential volatility and divergence, that is exactly how we want it to look to ensure that the portfolio is robust to any significant shifts in the macroeconomic environment.
- Property: Against the backdrop of lower rates and following a challenging period, real estate is poised to deliver better returns in the coming years. Pricing is now at an attractive level, which should be supportive and is one reason we believe the asset class could be a valuable source of diversification within a multi-asset portfolio.
The other sections expand on our asset class outlooks in the context of a divergent global backdrop.