Observations from T. Rowe Price
We expect the global economy to adjust to higher trend inflation, higher interest rates, and greater volatility.
Though inflation remains sticky, market conditions appear favourable for a growing U.S. economy. Investment opportunities are emerging across multiple sectors and regions as earnings growth broadens beyond 2024’s concentrated leadership.
Investors should consider diversifying into areas with valuation support and robust fundamentals, such as high yield bonds and value stocks, while maintaining flexibility amid heighted market volatility. Select opportunities could be found in underappreciated sectors such as energy, financials, and industrials. Countries like Japan could benefit from structural changes.
Thomas Poullaouec, Head of Multi-Asset Solutions APAC:
“As we enter 2025, we remain constructive about the outlook for stocks in the year ahead. Economic growth remains positive, led by the U.S. where generous fiscal spending and a resilient job market support consumption. Central banks are on an easing path although current market pricing doesn’t fully reflect underlying uncertainties. Inflation may prove to be sticky with upside risks due to tariffs. Given this backdrop, we expect U.S. treasury yields to move higher and prefer high yield debt within the fixed income sectors. T. Rowe Price’s Multi-Asset investment team anticipates a broadening of the market over the next six to 18 months, overweighting value stocks. In an environment where not enough uncertainty is priced into most asset classes, we keep an overweight to cash and to real asset stocks due to inflation risks.”
Ken Orchard, Head of International Fixed Income:
“Despite the U.S. Federal Reserve starting its monetary easing cycle in September, yields could move higher if the central bank does not cut as deeply as markets expect. I think high yield bonds and bank loans remain the two fixed income sectors with the most potential to generate meaningful income in 2025, while emerging market bonds also present solid income opportunities. We anticipate continued volatility in the wake of the U.S. presidential election, leading credit spreads to widen from the unusually narrow levels experienced through most of 2024. However, I do not foresee a global recession in the next 12 months, so the spread widening should be relatively modest as rate cuts and lower energy prices continue to support the consumer and economic growth. Global growth could surprise on the upside. The risk of an inflation resurgence is high enough to consider including a small allocation to inflation-adjusted bonds such as Treasury inflation protected securities in a diversified portfolio.”
Also read: Wait and See – Three Things to Watch in 2025
Nicholas Vidale, Investment Analyst, International Equity:
“The Australian economy has been the beneficiary of a post-COVID government spending surge, which has been driven by State governments. This has underpinned inflationary pressures in the Australian economy and forced the Reserve Bank of Australia to hold interest rates higher for longer, at a time when other central banks globally have been cutting interest rates. With State government budget deficits now running at 3-4% of Gross State Product, and State debt levels now at the highest levels in over 30 years, we expect growth in government spending to slow. This will eventually see both economic and employment growth to moderate and reduce the upwards pressure on interest rates and inflation.”
Sam Ruiz, Portfolio Specialist, Global Equity:
“The sustainability of equity market performance is a key consideration as we approach 2025. We think the U.S. market is poised to deliver robust returns. The U.S. economy has demonstrated remarkable resilience, successfully achieved a soft landing. The Republican sweep in the U.S. presidential election could add fuel to this momentum. The anticipated fiscal policies under the new administration, combined with expected monetary easing, could provide further support for economic growth. The proposed tax reforms could potentially enhance corporate profitability and strengthen business fundamentals. This economic environment could benefit a broader range of U.S. companies beyond the concentrated leadership we’ve witnessed in recent years. Sectors that have been historically undervalued, particularly financials and industrials, present compelling opportunities. We maintain a cautious stance on emerging markets amid uncertainties surrounding trade policies. The implementation and scope of potential tariffs – whether broad-based or targeted – remain unclear. While this environment may present challenges for China, other markets such as Vietnam could potentially benefit from supply chain diversification, though risks persist.”
