by Kevin McCreadie, MBA, CFA®, CEO and Chief Investment Officer, AGF Management Ltd.
We believe 2025 will be another positive year for investors, but central banks and the incoming U.S. administration will play a role in the potential opportunities that arise.
Some investors may not want 2024 to end, given how well financial markets have performed this year. Global stock indexes have climbed more than 20% in some instances and have continued to reach new all-time highs in the process. As much as that might seem like a tough act to follow in 2025, it is clear that many of the macro conditions that fueled 2024’s stellar results are still in play. Economic growth is solid, if unspectacular in many countries, and the interest rate environment has slowly become more accommodative since the summer. And while Donald Trump’s next term as U.S. President brings a new wave of policy risk to the table and could dampen returns somewhat over the next 12 months, we believe that for investors overall, and particularly those with a well-positioned portfolio of stocks, bonds and alternatives, 2025 will be another positive year.
But just how positive? That is the big unknown, and the outcome may largely depend on the direction of monetary policy, which has become the great pre-occupation of markets in recent years. This is true globally, but especially as it relates to the U.S. Federal Reserve (Fed) and its ongoing pursuit of a soft landing for the U.S. economy. At question, specifically, is the Fed’s easing cycle and the degree to which it may cut interest rates further in 2025. Current estimates suggest that two or three more cuts of 25 basis points each may be in the cards. But given the country’s economic resilience to date and prospects of more stimulus from the new U.S. administration next year, that monetary easing is hardly guaranteed and the spectre of “higher for longer” may continue to loom.
In fact, Trump 2.0 could be a double-edged sword for investors. For instance, the president-elect’s pro-growth agenda, which promises lower taxes and reduced regulation, seems decidedly bullish for U.S. equities, but it could also work against the market should economic activity heat up too much and force the Fed to slow the pace of its easing cycle even further in response.
Then there is Trump’s plan to slap tariffs on all imported goods, which, if they reignite U.S. inflation, could elicit a similar response from the Fed. That not only could be a drag on U.S. stock performance – all things being equal – but may also negatively impact the potential for capital gains from investments in certain bond markets globally. Indeed, yields on longer-dated Treasuries initially climbed post-election. However, they have since retreated as investors reassess the impact of other measures.
Even if Trump’s tariffs don’t fuel higher consumer prices as expected, they might still negatively impact global stocks that trade in jurisdictions caught in the crosshairs. China’s fate is notably perilous on this front, but other economies with otherwise strengthening fundamentals, such as Canada, Europe and Japan, are likely susceptible, too.
Beyond these potential trade dynamics, Trump’s administration could disrupt global markets in other ways. One is his anticipated foreign policy, which could stoke already heightened geopolitical tensions. Another is his potentially inflationary pledge to deport millions of immigrants and force many companies to “pay up” to replace lost workers.
Source: AGF Asset Allocation Committee Fourth Quarter Update (as of October 1, 2024). For Illustrative purposes only.
All in, then, investors might find it challenging to garner positive returns in 2025 to the same degree as this past year. Yet the path ahead still seems ripe with opportunities for potential gains. In particular, AGF Investments’ Asset Allocation Committee heads into the new year with an overweight to equity versus fixed income and has a preference for U.S. equities over other developed countries and the Emerging Markets (EM). While bond returns from capital gains may be limited by the pace of interest rate cuts going forward, we believe yields at current levels remain attractive; credit and EM debt should help bolster overall fixed income performance.
Of course, this view only represents a starting point for how 2025 may unfold. There are risks, but if investors remain well-diversified across asset classes, and as long as monetary easing doesn’t veer off course too dramatically, they likely will not regret toasting the new year after all.
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Kevin McCreadie, MBA, CFA®
CEO and Chief Investment Officer
AGF Management Ltd.
The views expressed are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds, or investment strategies.
Commentary and data sourced from Bloomberg, Reuters and other news sources unless otherwise noted. The commentaries contained herein are provided as a general source of information based on information available as of December 3, 2024. It is not intended to address the needs, circumstances, and objectives of any specific investor. The content of this commentary is not to be used or construed as investment advice, as an offer to buy or sell any securities, and is not intended to suggest taking or refraining from any course of action. Every effort has been made to ensure accuracy in these commentaries at the time of publication, however, accuracy cannot be guaranteed. Market conditions may change and AGF Investments accepts no responsibility for individual investment decisions arising from the use or reliance on the information contained herein.
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