When consensus dominates the market, unexpected surprises often lurk just around the corner. Could the U.S. economy prove weaker than anticipated, while Europe is stronger than expected? Is the threat of inflation a thing of the past, or could it re-emerge with greater intensity?
Investment Officer surveyed major asset management firms to uncover the potential surprises they foresee for 2025. Their insights yielded the following ten “black swan” scenarios.
- China: low valuations, high expectations
A turnaround in China? Attractive valuations in Chinese equity markets spark hope for price gains in the region. Paul Jackson, global head of Asset Allocation Research at Invesco, highlights the cyclically adjusted price-to-earnings ratio (CAPE) at 15, far more appealing than the 40 seen in the U.S.
Vincent Juvyns, Global Market Strategist at J.P. Morgan, suggests that negative sentiment toward Chinese equities could quickly reverse with additional government stimulus, potentially making China the best-performing equity market of the year.
State Street emphasizes that a recovery in the Chinese market could benefit not only China itself but also emerging markets globally, providing a boost to global economic growth.
- Renewables back in the spotlight
Investor enthusiasm for sustainability projects may have cooled, but Joeri de Wilde and Maritza Cabezas of Triodos Investment Management believe investments in the energy transition will remain robust, as the transition represents a structural trend.
Chris Teschmacher of Legal & General AM considers it unlikely that Trump would roll back Biden’s Inflation Reduction Act. While the incoming president may not prioritize sustainability, the associated projects are significant drivers of job creation.
William Davies of Columbia Threadneedle agrees that renewable energy stocks could surprise in 2025, though he warns that as the 2030 deadline approaches, energy transition targets may become diluted.
- Europe: not so bad after all
Amid a prevailing narrative of “American exceptionalism”, Europe could be the biggest surprise in 2025. Lodewijk van der Kroft of Comgest highlights that Europe’s strength lies in the widespread expectation that the U.S. will continue to outperform, bolstered by American equities’ 75 percent weight in the MSCI World Index.
L&G points to attractive valuations outside the U.S., suggesting that Europe and Asia have the potential to surprise positively, given current pessimistic market expectations. Japan might even outshine Europe in this regard.
- Geopolitical tensions ease
While conflicts like those in Ukraine and the Middle East seem far from resolution, surprises are always possible. Trump claims he could resolve the Russia-Ukraine conflict in a day, and even one conflict resolution would surprise both Triodos and J.P. Morgan.
- U.S. midcaps in the limelight
Investors’ attention remains fixed on U.S. markets, particularly the “Magnificent Seven”. Henk-Jan Rikkerink of Fidelity International identifies U.S. midcap stocks as a potential surprise for 2025. With a domestic market focus, midcaps are better positioned to benefit from Trump’s tax reforms, deregulation, and fiscal stimulus. Moreover, their valuations are more attractive than those of largecap stocks.
- Unbounded growth in data centre investments
The rise of AI is unmistakable, yet the vast investments required in data centres often go unnoticed. Roelof Salomons, CIO of BlackRock, notes that estimated data centre spending could soar to 700 billion dollar by 2030, equivalent to 2 percent of U.S. GDP. “It’s like a high-stakes card game, with the bets getting bigger and bigger.”
- Disappointment in U.S. dollar dominance
The U.S. dollar’s ascent seems unstoppable, but Altaf Kassam of State Street Global Advisors sees reasons for caution, viewing the currency as 15 percent overvalued. A weaker dollar could relieve pressure on non-U.S. and emerging market assets, which stand to gain significantly.
Invesco echoes this sentiment, warning that unfunded tax cuts and higher yields could turn the “Trump trade” into a “Truss trade”.
- Persistent inflation
Inflation could persist longer than expected. Kevin Thozet of Carmignac warns that the pressure to support government debt through monetary policy is underestimated, with potential implications for rising prices. Meanwhile, a bond vigilante backlash cannot be ruled out, possibly triggering significant movements in bond markets.
Marco Willner of Goldman Sachs Asset Management predicts higher-than-expected inflation in the first half of the year, continuing to exceed expectations in the second half. This would be driven by a combination of policies under the new administration and accelerated U.S. economic growth.
Chris Iggo, CIO of AXA Investment Managers, suggests that Trump’s policies could reignite inflation, necessitating higher rather than lower interest rates in the U.S.
- Mortgage-backed securities: a hidden gem
Should the Fed lower interest rates, part of the 7 trillion dollar in money market funds could flow into fixed-income assets. Julien Houdain of Schroders believes securitized assets, such as agency mortgage-backed securities, stand to benefit. Relaxed U.S. regulations could further boost demand for these assets, especially among banks.
- Trade wars: little impact on markets
Despite the noise surrounding trade wars, Jacob Vijverberg of Aegon Asset Management expects their impact on equity markets to be limited. While traditional sectors like European carmakers may suffer, tech giants are unlikely to be significantly affected. As a result, trade wars would have minimal effect on global equity indices.