The Divergence Dilemma - What Global Fragmentation Means for Investors
2024, “The Year of the Ballot Box”, saw a changing of the guard as half the world's population went to the polls with many incumbents ousted or losing majority control. All this played out amid a backdrop of increasing volatility and geopolitical risks globally. Despite these challenges, the growth backdrop remained robust, particularly in the US, as inflation continued to recede and central banks began their much anticipated easing cycle. This spurred equity markets to new all-time highs, buoyed also by continued optimism around the potential benefits that AI can bring. We started and are ending 2024 positive on risk assets, which have delivered strong returns for our clients.
Opportunities amidst Uncertainty
As we face 2025, investors will imminently have to grapple with what the return of a Trump presidency will mean for the political and economic world order. While Trump’s victory was not the shock it was in 2016, given voters’ dissatisfaction with the economy and the “cost of living” in particular, it will likely prove the most consequential result of “The Year of the Ballot Box”. Though nothing is confirmed in terms of policies to be enacted under Trump 2.0, it is widely anticipated that there will be an increase in tariffs, tax cuts, tighter immigration policy and deregulation. This policy mix will create both opportunities and challenges.
Our base case for 2025 is to see continued, but moderating, global growth, led by a strong US economy, with regional disparities becoming apparent. Trump’s potential corporate tax cuts and deregulation can act as a catalyst for continued strength for US companies relative to the rest of the world, especially Europe and China. This supports continued US exceptionalism, a theme we wrote about earlier this year. On the downside, more aggressive tariff policies and stricter immigration, in the face of already elevated equity market valuations pose risks. Additionally, a stronger growth backdrop could have an inflationary impact which would put upward pressure on bond yields and eventually equities. This mix of opportunities and uncertainties creates a broad range of potential outcomes centred on a base case of steady but moderating global growth.
Implications for Investors
As our team outline in the following sections, we see this central case of a relatively supportive growth backdrop, continued moderation in inflation and further policy easing from central banks as positive for risk assets, while fixed income offers both income and diversification to investors.
Looking into 2025, the macroeconomic and geopolitical backdrop under a Trump-led America leaves markets susceptible to increased volatility particularly given already high valuations, the risk of a less benign tariff position and negative implications for global trade and growth. In this environment, investors require a disciplined and robust approach to asset allocation that strikes the right balance between managing downside risk, while remaining nimble enough to take advantage of opportunities and market dislocations as they occur. We continue to emphasise the need for a balanced approach and diversification across portfolios to build resilience against shocks and to deliver strong investment outcomes through this potentially divergent cycle ahead.
I would like to thank the team for their contributions to the investment outlook and wish all our clients well for 2025.