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WEALTHIFY’S INVESTMENT OUTLOOK Q1 2025
DIVERSIFICATION STILL THE PRIORITY IN UNCERTAIN TIMES
With Donald Trump’s re-election shifting 2025's investment outlook considerably, a patient, diversified approach is key to increasing potential return and protecting against volatility.
In the short term, US markets reacted well to the election result, providing a boost to share prices and rounding off a strong 2024. The S&P 500 finished up more than 20% for the year, delivering its best two-year run for more than 20 years.
Despite this, 2025 brings worries that many of President Trump’s pro-growth strategies could be inflationary.
Whilst global interest rates are expected to continue falling in 2025 there is a risk that markets will react negatively if those expectations are pushed back.
This was seen in the Federal Reserve’s (the Fed) recent December meeting when, despite an interest rate cut being announced, markets reacted negatively to interest rate expectations being scaled back.
We continue to be cautious, preferring interest rate-sensitive assets such as duration bonds, infrastructure, and property. These have benefitted greatly from the rapid decrease in interest rate expectations, while providing insurance against a more negative-than-expected outcome over the course of the year.
As always, we’re ready to increase the number of shares in Wealthify Plans.
However, we also remain aware of the consequences of purchasing at high valuations and, depending on the region or country, shaky economic fundamentals.
Regional diversification will remain important in 2025 (and beyond). Major economies – particularly Europe and China – will have to navigate the changes to US trade policy, which have potential to weaken global growth prospects.
But things could also be better than expected — and market performance is a function of how reality pans out relative to expectations.
The Eurozone economy was relatively stagnant throughout 2024, facing a range of cyclical and structural challenges such as decreased consumer demand from China (a major consumer of European exports). This may improve in 2025, however, as falling inflation in Europe and lower interest rates help boost consumer confidence. With valuations at low levels and advantageous monetary policy, we think the outlook may be more positive than many expect.
The focus in the first quarter of 2025 will primarily be on the new administration in the White House; more specifically, how new policies could determine the path of interest rates and, in turn, growth.
The US labour market will continue to be pivotal to how this unfolds.
Why?
Because jobs create incomes — and incomes create spending.
We continue to think carefully about the risks of being too optimistic on the soft landing scenario (a slowdown in economic growth that avoids a recession), as history indicates that monetary policy would have to be perfectly aligned to achieve this.
History also shows us that markets can become short-sighted and complacent with near-term optimism, fuelling lofty and unrealistic expectations as a result.
Protect capital while seeking opportunities
While US inflation appears to have peaked, stubbornness in the service sector remains a concern — with worries of a re-ignition on the back of some of Trump’s inflationary policies.
Central banks across the globe have begun to lower interest rates, which runs the risk of a potential resurgence of inflation.
We have favoured more established share markets as a defence against riskier ones, while favouring high-quality government bonds. We have also maintained a healthy allocation to alternative assets, which broaden the diversification of your Investment Plans.
We remain ready to take advantage of attractive pricing opportunities as and when they present themselves but are also conscious of protecting your Plans against losses.
Top risks
- Policy Uncertainty: A Donald Trump presidency has brought with it risks to the global economy, such as inflation, trade wars, and geopolitical risk.
- Global Slowdown: Despite cuts, rates remain restrictive, with a material risk of greater-than-expected economic and corporate profit downturn.
- Debt Crises: Geopolitics, high inflation, and potential fiscal policy errors could increase the risk of credit downgrades and crises fuelled by debt sustainability concerns.
- Stagflation: A resurgence of or stickier-than-expected inflation are a concern, given that interest rates are on the way down.
- China: Regulatory crackdowns and property market troubles remain an issue. Relations with the US are also an ongoing threat to the global economy.
- Climate Change: Increasingly disruptive impacts on economic activity and supply chains are a threat to growth, and may drive further inflation.
INVESTMENT OUTLOOK TABLE Q1 2025
Outlook Key
| Shares | Outlook | Rationale |
|---|---|---|
| Region | Current Quarter | Why the outlook is what it is |
| United Kingdom |
Both large and small UK companies are historically cheap, generating significant amounts of their earnings offshore. Low valuations and defensive qualities are favourable in a slowing economy.
|
|
| United States |
US equities offer access to more resilient, diversified, and defensive business models and sectors. However, valuations have continued to expand, which has lowered their potential return (meaning we stay at neutral for now).
|
|
| Europe ex United Kingdom |
While European shares remain vulnerable to a recession, we think that expectations and sentiment have fallen to extremely low levels. Coupled with the European Central Bank (ECB) making strong progress on cutting rates, we think the environment could continue its momentum and deliver better-than-expected results. For these reasons, we’ve upgraded Europe to neutral.
|
|
| Japan |
Japan’s economic environment has continued its momentum, benefitting from a wage-price spiral that has created healthy inflation for now. The possibility of a sustained recovery is decent and, with a severely devalued yen, we’re mildly positive.
|
|
| Emerging Markets |
While Emerging Markets are likely to suffer more in the event of a global recession, they currently trade on attractive valuations.
|
|
| Asia Pacific ex Japan |
China remains central to the investment case for this region. While governance, geopolitical concerns, and property market woes are a negative, we see a possible rebound in asset prices given cheap valuations. This comes with a healthy dose of caution, hence our neutral stance.
|
|
| Shares Total |
|
We’re slightly underweight on shares due to the potential for greater-than-expected earnings disappointments. This is as a result of a deteriorating economic outlook and high growth expectations.
|
Total
We’re slightly underweight on shares due to the potential for greater-than-expected earnings disappointments. This is as a result of a deteriorating economic outlook and high growth expectations.
| Fixed Income | ||
|---|---|---|
| Government Bonds | Outlook | Rationale |
| Region | Current Quarter | Why the outlook is what it is |
| United Kingdom |
UK government bonds (gilts) have been through a sustained period of negative performance, as rates increased rapidly on the back of soaring inflation. With much of the rate hiking cycle seemingly behind us, gilts offer attractive potential with low risk, despite short-term volatility.
|
|
| United States |
US government bond yields have increased significantly over the past year. We think they offer attractive upside potential and protection in the case of a recession. With much of the rate hiking cycle behind us, little downside risk remains.
|
|
| Europe ex United Kingdom |
We remain neutral as we continue to monitor the outlook for this asset class. This is against a very uncertain geopolitical and economic backdrop, where strong ECB interest rate hikes have increased the risk of policy error.
|
|
| Japan |
Japanese bonds offer little income and remain on the back foot with the Bank of Japan’s recent interest rate hikes. We prefer Japanese shares in this environment.
|
|
| Emerging Markets |
While Emerging Markets’ government bonds offer stronger potential than Developed Markets, we remain slightly negative given the potential for a global recession (which would see a flight to safety towards developed markets such as the US).
|
|
| Corporate Credit | Outlook | Rationale |
| Region | Current Quarter | Why the outlook is what it is |
| United Kingdom |
We are cautious on UK investment grade credit, owing to the relative history of tight spreads and UK Gilts.
|
|
| United States |
Our outlook for US investment grade credit has dimmed somewhat, as valuations have fallen dramatically below long-term averages.
|
|
| Europe ex United Kingdom |
We remain negative on European credit because of the many remaining risks, such as high inflation, weak growth, and geopolitical tensions.
|
|
| Japan |
Like Japanese government bonds, Japanese corporate bond prices offer very little income — and are therefore unattractive.
|
|
| Fixed Income Total |
|
We are positive on bonds due to the improved yield environment, as well as their defensive nature in a slowing and negative economic environment. We prefer government bonds over corporate bonds, which offer very little yield enhancement.
|
Total
We are positive on bonds due to the improved yield environment, as well as their defensive nature in a slowing and negative economic environment. We prefer government bonds over corporate bonds, which offer very little yield enhancement.
| Alternatives | Outlook | Rationale |
|---|---|---|
| Region | Current Quarter | Why the outlook is what it is |
| Environmental |
Companies focused on reducing their environmental impact often have a competitive advantage due to greater resource efficiency, leading to lower costs. They may also experience lower downside risks, due to more robust corporate governance and better management teams.
|
|
| Global Real Estate |
Global real estate offers attractive value, underpinned by improved rental income streams and high interest rates. Recent troubles in the banking sector, however, mean caution is needed.
|
|
| Global Infrastructure |
The long-term outlook for Global Infrastructure remains positive, with a global need for advancement and investment. The asset class also offers exposure to stable revenue streams, which make it defensive in nature.
|
|
| Alternatives Total |
|
We are positive on alternatives over the long term.
|
Total
We are positive on alternatives over the long term.
Investment Table last updated 24/02/2025
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