Ten Investment Convictions for 2025

2024 has been an above-average year for multi-asset portfolio performance. We see a positive economic backdrop continuing in 2025, with ongoing global disinflation and lower central bank rates. Yet growth and interest rate outlooks will diverge across economies, making active management essential.

A multipolar world continues to force countries to focus on domestic interests. A new Trump administration in the US will be most visible in trade, energy, industrial, fiscal and foreign policies. It will boost government spending and investment expenditures.

Short-term interest rates will decline and money market instruments’ yields will be weaker. This is clearest in Switzerland, where we expect policy rates to fall to 0.25%. Global investors will need to deploy capital while being selective and actively managing portfolios.

In fixed income, we keep our preference for corporate bonds, which will provide higher returns than government bonds. The latter will be challenged by rising budget deficits and public debt, generating more yield volatility. We therefore focus on where we see least pressure for bond yields to rise, notably Germany and the UK.

In equities, the outlook for earnings is strong, yet valuations are already very high. Where valuations look more appealing, the earnings outlook is less enticing. In the US, we expect deregulation and lower taxes to extend economic and equity market exceptionalism. Trade tariffs will weigh on growth elsewhere. We favour Japanese equities in non-US developed markets and Korea/Taiwan in emerging markets.

In equities, the outlook for earnings is strong, yet valuations are already very high

Following new US trade and energy policies, 2025 will likely be a year of US dollar strength and lower oil prices. We expect gold to perform well on haven demand and structural buying from central banks, but returns are unlikely to be comparable to 2024. Industrial metals should be supported by positive economic growth.

This leaves an even greater role for alternative assets to play in extending investment opportunities for multi-asset portfolios. Here we emphasise the role of real estate, hedge fund strategies and private assets.

Portfolio risk

Increasing exposures to risk, ensuring diversification

1. Reducing cash and deploying capital

We expect recession risks to be low in 2025 and anticipate central banks cutting interest rates on continued disinflation. Where we see the lowest central bank rates (Switzerland and the eurozone), there is most incentive to deploy capital into markets, ensuring adequate diversification.

Fixed Income

Focus on income and markets with lowest public debt pressures

2. Investment grade and high yield corporate bonds to outperform

We prefer the yields offered by corporate over government bonds across developed and emerging markets. Higher corporate yields can provide attractive sources of income for multi-asset portfolios. In Europe we like German, French, Spanish, Italian and UK issuers. In emerging markets, our preference is also for corporate over sovereign issuers. However, given tight spreads over sovereign bonds, selectivity is key within Asia and Latin America. We favour 5-7 year maturities for euro and sterling denominated investment grade corporate bonds. For Swiss franc and US dollar denominated bonds, we favour 3-5 year maturities. In high yield, we favour short-dated bonds.

We prefer the yields offered by corporate over government bonds across developed and emerging markets

3. Government bonds to underperform. Prefer German Bunds and UK Gilts

In a world of rival geopolitical blocs, strategic competition requires investment, leading to increased public debt. Yet government bonds can offer a haven in periods of high geopolitical risk. In the US, more stimulative economic policies and a rising deficit could see yields rise and US Treasuries underperform. Better prospects exist for UK Gilts and German Bunds. Germany’s sound public finances leave room for investments, and falling European Central Bank rates will also benefit Bunds. In the UK, we expect somewhat higher growth in 2025, and inflation slightly above target, with revised fiscal rules providing more flexibility. Still, a moderate inflation path should allow the Bank of England to cut rates more extensively than markets expect, supporting Gilts.

Equities

Growth-related assets to perform well

4. Equities to benefit from resilient growth and lower interest rates. Prefer US and Japan in developed markets; Taiwan and Korea in emerging markets

Historically, equities have done well in periods of sustained growth and falling interest rates. We expect strengthening corporate profitability under the next US administration to extend the performance of US equities. Japanese companies should also benefit from equity-friendly domestic policies and a currency less prone to appreciation. In emerging markets, strong technology-related exports should provide a tailwind for Taiwan and South Korea. This should help offset the impact of US tariffs, making the impact in these markets milder than in China.

5. Cyclical sectors to outperform, with a preference for materials

Macroeconomic conditions and the investment needs of a multipolar world are likely to benefit cyclical sectors. We believe materials will be the first to benefit from the tailwinds this creates. More sectors will follow, including industrials, later in the year.

Macroeconomic conditions and the investment needs of a multipolar world are likely to benefit cyclical sectors

6. Infrastructure investments to materially increase

We expect the US elections and potentially German elections to act as catalysts in developed markets to convert some of the reported infrastructure investment needs into infrastructure spending. In emerging markets, investment remains strong, with the extension of the BRICS group to additional countries and its cooperation framework focusing attention on infrastructure. In equities, we focus on stocks from companies along the length of the value chain, from materials to infrastructure operators, which will benefit from rising infrastructure spending.

Alternative investments

Liquid and private alternative investments have a bigger role to play in multi-asset portfolios

7. Real estate as an income alternative in low-yielding markets

With falling central bank rates and a solid growth outlook, real estate investments offer alternative sources of income in markets with comparatively low bond yields. The clearest case for real estate investments as a fixed income alternative is in Switzerland. The eurozone may also become more attractive.

The clearest case for real estate investments as a fixed income alternative is in Switzerland

8. Hedge funds and private assets increase the investment universe

In hedge funds, the performance of event-driven and relative value strategies’ improved in 2024. Since the US election, hopes for looser corporate regulation are expected to stimulate dealmaking. This helps merger arbitrage managers and increases capital market activity, creating opportunities. Market conditions now seem supportive for hedge fund strategies that exploit the volatility of an underlying asset (so-called ‘non-directional’ strategies). The outlook for such strategies in the coming years is better than we have seen for much of the past decade. In private assets, we see private equity as a tool to broaden the set of investment opportunities in portfolios. The most innovative companies have tended to stay private for longer in recent years and investment returns are steepest during this time. These opportunities also provide portfolio diversification, as the number of listed companies has declined in many markets.

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9. Gold will still add value in 2025

Lower central bank rates reduce the opportunity cost of holding gold as a non-yielding asset. Central bank buying to diversify reserves from dollars, in part as a response to geopolitical developments, should also keep supporting gold prices. A stronger US dollar is a headwind for gold, but we do not think it will prevent individual investors increasing investment flows into gold. The price of the precious metal in other currencies than the US dollar is likely to increase and will likely sustain flows into gold and gold-related financial instruments.

The US dollar will likely emerge as a key beneficiary of the new Trump administration

Currencies

A stronger dollar

10. US tariffs and interest rate differences support the dollar

The US dollar will likely emerge as a key beneficiary of the new Trump administration and its policy priorities in 2025. This will further extend the theme of US exceptionalism. We expect most currencies to weaken against the dollar, especially currencies of open economies. These include the euro, sterling and Asian currencies including the Chinese yuan. We expect the Swiss franc and Japanese yen to initially suffer against the dollar in 2025, although US tariff risks could see greater resilience from both currencies in the latter part of the year.