Seeking growth and income opportunity at a reasonable price

By Raj Singh
Portfolio Manager, Multi-Asset

In 2025, inflation remains a pivotal concern for markets. While it continues to be persistent, it is significantly lower than the peaks experienced in 2022. The Federal Reserve is expected to uphold its easing strategy, albeit at a more measured pace, as it assesses the inflationary impacts of Trump Administration's policies. This monetary policy stance is supportive of market conditions. Trump's anticipated deregulation efforts are likely to stimulate U.S. economic activity over time. The theme of U.S. exceptionalism appears poised to persist, underpinned by a favorable macroeconomic environment. The combination of supportive liquidity from the Fed’s easing cycle and a robust economy creates a compelling backdrop for investors.

U.S. equities have achieved approximately 50% returns over the past two years, a momentum that is difficult to counter. However, we do not foresee returns of that magnitude in the next two years. Globally, we project a 12% earnings growth in 2025, with the U.S. expected to reach 15%. We anticipate a rotation within U.S. equities, as growth outside of the "Magnificent Seven" aligns more closely with the broader market. Importantly, the positive performance of the U.S. does not imply poor outcomes for global markets.

We expect many international markets to present opportunities in 2025, partly due to the strength of the U.S. economy. Countries such as Japan, while not matching U.S. growth rates, are export-driven and likely to benefit from sustained U.S. domestic demand despite potential tariffs. While U.S. valuations may seem concerning, they indicate an opportunity for rotation both domestically and globally. Japan offers more appealing valuations alongside growth potential from corporate reforms. Although India’s market appears expensive, its robust economic growth and lower sensitivity to U.S. tariffs may support its performance. Additionally, Taiwan equities could benefit from strong demand related to AI advancements. In China, investors might consider high-dividend equities poised to gain from capital market reforms and lower interest rates.

In 2025, we anticipate a more favorable environment for bonds, primarily as the bond yields have moved substantially higher since first Fed rate cut back in September 2024 .The Fed is in an easing cycle—albeit slower than previously expected but market has significantly reduced Fed cut expectations for 2025 while both near term and long term market based inflation expectations have also moved up, indicating that to a larger degree Fixed income markets have already priced in potential impact of US policies on inflation. If the Fed cuts rates as outlined in its Dec meeting, the bond market could experience a smoother trajectory, and duration becomes advantageous in this context. Currently, spreads across all segments of the fixed income market are tight. However, many investors focus on yield, not spreads. Therefore, we remain yield-oriented, emphasizing attractive yields from an income perspective. As we enter the new year, we continue to favour credit especially at the shorter end.

Within Asia Fixed Income, investors should be selective on issuers and focus on high quality balance sheets to navigate complex dynamic of trade, geopolitical tensions and reconfiguration of supply-chains.

We believe that establishing the right multi-asset balance in 2025 would pave the way for another successful year for investors, we expect healthy advancements in risk-on portfolios as we move forward while Fixed Income could provide income and stability.