Geopolitical uncertainty could limit equity gains in 2025. Major asset managers recommend diversification and careful risk management to handle expected market volatility. Their view is clear: while equity markets may still rise, repeating 2024’s strong performance will depend on a level of geopolitical stability that seems unlikely.
A lot needs to go right in 2025 for equities to match or surpass their extraordinary performance of the past year, writes William Davies, Global CIO of Columbia Threadneedle, in response to a question from Investment Officer about the focus of his expectations for the coming year. This was one of the questions posed in a short survey conducted among major international asset managers regarding their outlooks. “Geopolitical risks must stabilise,” Davies stated, adding that he does not expect this to happen. While equity markets may deliver gains, they are unlikely to approach the scale seen in 2024.
“2024 was an election year, and 2025 will be the year when populist election promises collide with the realities of financial markets.”
Kevin Thozet, Carmignac
Aegon Asset Management also anticipates a turbulent year. According to Jacob Vijverberg, head of asset allocation, 2025 will be a year fraught with “numerous dangers for the economy and markets.” Invesco and Carmignac attribute much of this to US politics. “2024 was an election year, and 2025 will be the year when populist election promises collide with the realities of financial markets,” said Kevin Thozet of Carmignac.
Paul Jackson, global head of asset allocation at Invesco, also foresees rising uncertainty: “The current enthusiasm for the Trump programme will wane, and we must prepare for bouts of volatility stemming from fiscal policy, trade policy, and geopolitical events.” Chris Iggo, CIO of AXA Investment Managers, is particularly concerned about the potential for a trade war.
Correlation between equities and bonds
Investors need to prepare for volatility, and LGIM highlights the correlation between equities and bonds in this context. Historically negative, this correlation has been positive in more years than not over the past two decades, meaning the returns from these two asset classes moved in the same direction rather than compensating for each other. Recently, however, the correlation has returned to negative territory, noted Chris Teschmacher of LGIM, which is good news for investors seeking to spread risk.
However, this positive development may be short-lived: “A peak in inflation will push returns in the same direction again, increasing portfolio risk,” warned Teschmacher, who also points to the potentially inflationary nature of the Trump programme. That said, there are non-inflationary elements as well: if Trump’s policies lead to an end to the war between Russia and Ukraine, the oil price—a key factor in inflation figures—could drop significantly.
Schroders also sees the potential for bonds to be included in portfolios more frequently, aiming for risk diversification. “At lower inflation levels, they can provide a more efficient hedge against weakness in cyclical assets,” said Lisa Hornby, head of US Fixed Income at Schroders. Bonds may also be attractive in terms of returns: “They are cheap compared to alternative assets, with yields currently higher than the expected earnings yield on the S&P500.”
However, J.P. Morgan Asset Management favours a significant allocation to alternative assets. Strategist Vincent Juvyns suggests that diversification need not rely solely on the current negative correlation between equities and bonds. In equities, he strongly recommends active management to address market dominance, which he considers cyclical.
Overblown pessimism
In terms of diversification, LGIM highlights the Mexican peso, which suffered after Trump’s election victory. European investments, such as German government bonds, are also a good diversification option. “We believe pessimism about Europe is exaggerated,” remarked Teschmacher.
Finally, Fidelity International looks to emerging economies as a diversification strategy. However, this asset manager stresses the importance of selectivity: broad investments in emerging markets are not advisable.
“We see opportunities in certain high-yield debt markets such as Brazil and South Africa,” wrote Henk-Jan Rikkerink, global head of Multi-Asset Solutions at Fidelity International. He added that he prefers this debt to be in hard currencies, given that political developments in the United States remain a dominant factor: “There is a strong chance of a stronger dollar.”