Avoid European equities and steer clear of most bonds. According to major investment houses, this is the key strategy to prevent issues in investment portfolios next year.
Extremely narrow spreads on corporate bonds, rising government deficits, weak growth prospects, and looming trade restrictions suggest that 2025 will likely be far from a celebratory year for bond markets. This is one of the conclusions from a brief survey conducted by Investment Officer among large international investment firms. We asked them, among other things, which asset classes investors should avoid in 2025. The responses highlighted two main themes: bonds in various forms and European equities.
“The problem” with Europe
Europe’s challenges are a well-trodden topic, and that doesn’t help, suggests Altaf Kassam, Head of Investment Strategy EMEA at State Street Global Advisors. Constantly having one’s weaknesses highlighted doesn’t inspire confidence. The same applies to the economy: investments are driven by confidence. It is not surprising that investments in Europe lag behind, particularly when compared to the United States, as trust in the region’s growth prospects continues to erode. Combined with weak consumption and disappointing domestic demand, the picture only darkens.
Vincent Juvyns, Market Strategist at J.P. Morgan Asset Management, adds that governments are struggling to implement (fiscal) reforms. Such reforms are limited, as they must be paired with pressing investment needs in areas like energy and defence, and they often provoke significant public discontent. France is a case in point. This has serious implications for economic activity: it remains subdued, and so do profit expectations.
Government deficits
The outlook for European equities is therefore uninspiring, but the same applies to European bonds, particularly government bonds. Roelof Salomons, Head of Investment Strategy at BlackRock Netherlands, does not completely rule out government bonds (‘avoidance is too strong a word’). However, he states that the normalisation process regarding interest rates is ‘not yet complete,’ necessitating a cautious approach. Columbia Threadneedle, through its CIO William Davies, is far firmer in rejecting government bonds—not just European ones. “Government deficits aren’t a concern until they become a concern—and by now, they should be,” Davies argues.
Budget deficits of 5 percent to 6 percent, as seen in the US, UK, Japan, and many European countries, may be manageable at low interest rates, but what happens when rates rise again? “Then the financing of these deficits becomes an issue. Once attention turns to this, it could shake many markets.”
Beyond developed market government bonds, other bond categories are also being dismissed in 2025 forecasts. For instance, Jacob Vijverberg of Aegon Asset Management is “less optimistic” about emerging market debt. Credit spreads are too narrow, he believes, and emerging economies will face significant challenges if more trade restrictions are imposed. Slowing growth in China compounds the problem. For Goldman Sachs Asset Management, China’s tepid progress is even a reason to avoid emerging market equities altogether.
Tiny spreads
Finally, US corporate bonds are also being placed in the “better to avoid” category by many investment firms, particularly investment-grade bonds. The most common objection? Minuscule spreads. The risk premium no longer adequately compensates for the inherent risks of corporate bonds. Chris Teschmacher of Legal & General Investment Management notes that spreads have not been this tight in the past 25 years. This comes despite clear signs that default risk is on the rise.
This also rules out high-yield bonds, according to Teschmacher, a sentiment echoed by Triodos Investment Management. “We expect significant turmoil and uncertainty in 2025,” write Joeri de Wilde and Maritza Cabezas, strategists at the asset manager.