Summary
We enter 2025 being constructive on higher yielding credit and global equities on a tactical basis. From a medium-term perspective, the world has become increasingly unpredictable in 2025 due to policy uncertainty. As such, maintaining a disciplined approach to portfolio risk is just as important as focusing on investment strategies, particularly as Trump's policies begin to impact the market post-inauguration.
1Q 2025 Market Outlook: Trump 2.0 - A test of market and economic resilience
Market consensus suggests that a Trump presidency, backed by a unified government, will likely bolster US economic growth and extend a period of US economic outperformance. With increased expectation of tax cuts and pro-corporate policies, which are likely to boost corporate earnings over the near-term, we have become more constructive on risk assets on a tactical basis, favouring global equities over bonds from a cross-asset standpoint.
This is an extract of our Q1 2025 Market Outlook. Click here to download the full report which includes a special feature “Trump’s tariff tango: Assessing the impact”.
Macro: Trump 2.0 policies to present challenges (and uncertainty) to “U.S. exceptionalism” in 2025
The J.P. Morgan Global Composite PMI Output Index has remained above the '50' boom-bust line for fourteen consecutive months, indicating ongoing global economic expansion.
The US economy continued to be a key driver of global growth and had displayed its “exceptionalism” throughout 2024. At this juncture, assuming the US economy continues to operate above potential, the odds of a no-landing scenario (i.e., continued overheating) have increased.
The US core Consumer Price (CPI) Index data for December 2024 showed positive progress, with shelter inflation - a notable portion of the core CPI basket - showing its smallest annual increase since January 2022. Though the trend is encouraging, we acknowledge that the potential inflationary impact of Trump’s various policies - especially tariffs - remains uncertain over both the short- and long-term. We believe that US inflation has generally been on a downward trajectory overall, especially compared to the reflationary first quarter of 2024.
To detect any signs of a reacceleration in inflation, we are closely monitoring labour market conditions and wage growth trends. Additionally, we remain mindful of any potential supply-side driven inflation risks that may arise from escalating geopolitical tensions.
Asset Allocation: While continued US exceptionalism may be hard to ignore, diversification remains relevant as ever
We are entering 2025 on a positive note. The US economy has expanded at a faster than expected pace in 2024, and the labour market remains robust, defying the impacts of tighter monetary policy implemented over recent years.
As such, we are constructive on higher yielding credit and global equities on a tactical basis. We are currently cautious on US Treasuries given the resilience of the US economy, which may disrupt the Fed’s easing cycle, as the odds of a US recession are decreasing and shifting towards inflationary growth.
From a medium-term perspective, the world has become increasingly unpredictable in 2025. For example, forecasts for US real GDP growth range from 0.5% to 2.9% for this year, as economists are uncertain about which policies President Trump will prioritise and the order in which he will implement them.
At this juncture, we believe that maintaining a disciplined approach to portfolio risk is just as important as focusing on investment strategies, particularly as Trump's policies begin to influence the market post-inauguration. As such, active risk management and diversification across various assets remain key.
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