The themes and threats set to define global markets in 2025

Elections, artificial intelligence and the continued dominance of the US turned out to be some of the biggest investment trends of 2024. But 2025 is likely to be a different story, according to Natasha Ebtehadj.

Which themes do you think will define 2025?

• Noise – ‘Rule by tweet’ may ultimately be how policy will be negotiated and shaped. As we have seen with the threats against China, Mexico and Canada, tariffs are being used as a negotiation stick to achieve other objectives such as on immigration. The 'art of the deal' will create a lot of noise in the market and potentially result in more volatility.
• The return of the US domestic economy – Ultimately, it should be a good year for US domestic plays. Regardless of the noise, we should see a period where industrial activity can pick up more broadly: there is greater certainty now we have moved past elections, and after a period of poor weather and digestion of high interest rates, we are hopeful that we may finally see investments start to spread further than AI data centres and into areas such as housing, where the supply shortage may finally bite. We are playing this through holdings in Vulcan and Eagle Materials.
• The market can move beyond AI – The market has once more been driven by the US and a concentrated number of stocks linked to AI, either directly or via the supply chain. The market concentration in the US in particular (which is two-thirds of the MSCI AC World index¹) is particularly narrow. A recovering US domestic economy may finally lead to a broadening out.
• Not so quiet on the eastern front – We will likely hear more from China both in terms of economic stimulus and possibly in response to the US's threats of further tariffs. Either way, Xi Jinping has awoken the country from an economic slumber. While the market has been disappointed with the lack of consumer-focused stimulus so far, there has been a definitive pivot to supportive economic policy, which is tackling some of the key structural issues in local government debt and the property market. This should gradually stabilise the economy first with further firepower saved for later, including to help mitigate the impact of US tariffs.

Which area are you most excited about for the year ahead?

China has the biggest scope to surprise – the late-year rally in the MSCI China index does not feel like it has priced in how significant the policy pivot has been. It will eventually feed through to our fund through multiple channels, either directly in internet plays that we hold such as Trip.com and Meituan, or indirectly via Japanese automation plays such as Keyence and SMC as industrial activity improves. Leading consumer brands should also benefit as confidence returns, although there is a question on the timing.

What is the biggest threat to global markets?

We are most worried about an extreme trade war where all sides' tariff threats are carried out in full as opposed to one where they are wielded to achieve economic concessions to the US. This would be potentially inflationary and hit global economic growth.

Are there any risks that you think investors are being complacent about?

Europe continues to struggle economically and a recovery in 2025 may be optimistic. Some of the issues may be more structural as automakers and some industrial companies face increased competition from China, while energy costs remain volatile as new global LNG (liquefied natural gas) sources are being fully ramped up. A weak political backdrop doesn’t help.

While European growth remains scarce, the macro is not the markets, and we can still find stocks in Europe that have more international growth drivers where we feel industry recovery may be in sight, such as for Campari in the spirits space.

And are there any risks that you think investors are overestimating?

We frequently hear that the US should underperform because it is 'expensive'. However, we feel that investors consistently underestimate the earnings growth that lies in the US. It has been the best performing region of 2024² so far and that has been partly due to its strong earnings growth; only Japan has been able to keep up.

Earnings growth has explained nearly half of the US market’s 29%³ returns so far this year, so the rally has been justified by improving fundamentals. And if a re-rating from 20x to 22x is the market paying ahead for earnings growth, it is reassuring that consensus earnings growth is among the highest for the US, at 15% growth in earnings per share for 2025⁴. Put another way, investors may be underestimating the US and its ability to grow into its valuation.