Our 2025 global outlook
Welcome to our 2025 global outlook. As we face another year of geopolitical, technological, and fiscal transformation, the ancient saying that ‘change is the only constant’ rings truer than ever.
Suitable for professional clients only.
quilter.com Past performance is not a guide to future performance and may not be repeated. Investment involves risk. The value of investments may go down as well as up and investors may not get back the amount originally invested. This communication is issued by Quilter Investors, a trading name of Quilter Investors Limited. Quilter Investors is registered in England and Wales under number 04227837 and is authorised and regulated by the Financial Conduct Authority (FCA) under number 208543. Registered office: Senator House, 85 Queen Victoria Street, London, United Kingdom, EC4V 4AB. This communication is for information purposes only. Quilter Investors uses all reasonable skill and care in compiling the information in this communication and in ensuring its accuracy, but no assurances or warranties are given. Investors should not rely on the information in this communication when making investment decisions. Nothing in this communication constitutes advice or a personal recommendation. This communication is for information purposes only and is not an offer or solicitation to buy or sell any Quilter Investors portfolio or fund. Any opinions expressed in this document are subject to change without notice and may differ or be contrary to opinions expressed by other business areas or companies within the same group as Quilter Investors as a result of using different assumptions and criteria. Data from third parties is included in this communication and those third parties do not accept any liability for errors and omissions. Investors should read the important information provided by the third parties, which can be found at quilter.com/third-party-data. Where this communication contains data from third parties, Quilter Investors cannot guarantee the accuracy, reliability or completeness of the third-party data and accepts no responsibility or liability whatsoever in respect of such data. Published: January 2025 QI 26797_28_9048
In this year’s global outlook, we look back at the last 12 months as well as considering the changing landscape facing investors in 2025. In addition, some of our investment partners share their thoughts on the investment outlook for a selection of key regions and asset classes. Finally, our expert portfolio managers look forward to what might be some of the standout issues impacting investors – the active vs passive debate, the role of fixed income, and the renewables investment opportunity. Please click on the images below or use the menu at the top right of your screen to read more.
The views of our investment partners
A changing landscape
Market review of 2024
Home
3
2
1
Contents
Is the active vs passive debate a distraction?
4
Will 2025 be the year of the bond?
5
Lindsay James
Read more
Marcus Brookes
You are here
Sacha Chorley
CJ Cowan
Stuart Clark
Decarbonisation and renewables investing
6
What is the investment case for renewables?
Marcus Brookes, Chief Investment Officer at Quilter Investors, looks at the drivers of this market performance and provides his review of 2024.
Despite all the headlines and noise, equity markets continued to climb higher in 2024 as most regions delivered double-digit returns.
Inflation is the rate of increase in the price of goods and services. For most countries, it is based on a basket of goods and services that are representative of the cost of living.
The US Federal Reserve, commonly known as the Fed, is the central bank of the United States of America, it operates in a similar way to the Bank of England in the UK.
Pivot is the term used to describe when central banks turn from being hawkish, (raising interest rates to fight inflation), to being dovish, (reducing interest rates to help support the economy), or vice versa.
A recession is a significant, widespread, and prolonged downturn in economic activity. Recessions often last six months or more, and one popular definition is that two consecutive quarters of economic decline or contraction constitutes a recession.
Central banks are the financial institutions typically tasked with managing a country’s financial stability, by implementing monetary policy. This will involve setting interest rates, watching price stability, and regulating other financial institutions or organisations.
Volatility is the extent and speed of change in the value of a financial security such as a bond or equity. The greater the movements in the price of a security, and the shorter the period of such changes, the higher its volatility.
The Magnificent Seven is a term used to describe Amazon, Apple, Alphabet, Meta, Microsoft, Nvidia and Tesla. They are also referred to as mega-caps.
Fiscal policy refers to governments influencing the economy through their decisions on the levels of taxation and spending.
The Federal Funds Rate is the Fed’s key short-term interest rate, like the Bank of England’s base rate.
Corporate bonds are bonds issued by companies. They are riskier than government bonds, so corporate bonds normally offer higher interest rates (or yields) to compensate for the added risk.
The US Federal Reserve, commonly known as 'the Fed', is the central bank of the United States of America, it operates in a similar way to the Bank of England in the UK.
Chief Investment Officer
We started last year with both optimism and caution, and those who watched our quarterly webinars will have often heard us use the phrase ‘cautiously optimistic’ to describe our outlook. Our caution came from the knowledge that global equity markets had seen substantial gains in 2023. This had led to stretched valuations, particularly in the US. Elsewhere, inflation had decreased, but it remained high enough to prevent central banks from significantly normalising rates. Additionally, consumer debt levels and default rates were rising.
A cautiously optimistic start to 2024
Strong equity returns in 2024
Returns by asset class and region
Past performance is not a guide to future performance and may not be repeated. Source: Quilter Investors and FactSet as at 31 December 2024. Total return, percentage growth, pounds sterling, rounded to one decimal place over period 29 December 2023 to 31 December 2024. Global equities is represented by the MSCI AC World Index, US equities by the MSCI USA Index, UK equities by the MSCI United Kingdom All Cap Index, Europe equities by the MSCI Europe ex UK Index, Japan equities by the MSCI Japan Index, China equities by the MSCI China Index, UK gilts by the ICE BofA UK Gilt Index, US Treasuries by the ICE BofA US Treasury (GBP Hedged) Index, global corporate bonds by the Bloomberg Global Aggregate - Corporate (GBP Hedged) Index, and global government bonds by the Bloomberg Global Aggregate Government - Treasuries (GBP Hedged) Index.
The US was the best performing region in 2024. The US economy remained resilient, with consumers continuing to spend, and the labour market holding tight. The enthusiasm for artificial intelligence (AI) sent tech valuations soaring with the Magnificent Seven dominating returns in the first half of the year. However, the second half of 2024 saw broader market participation. The latter part of 2024 was dominated by the US election with Trump winning a clean sweep of the presidency, the senate, and the house of representatives. This has given him, in his own words, an ‘unprecedented and powerful’ mandate to govern. Time will tell how his unique brand of politics will impact markets.
US equities drive returns
Read our outlook for 2025 here
As the world was processing Trump’s victory, an acrimonious breakup was happening 4,000 miles east of Washington DC. Germany's coalition government collapsed on the day Trump’s win was confirmed. Similar political instability was seen across the border in France, with four different prime ministers in one year, no budget, and a slew of unfinished bills. This upheaval, along with growth concerns, saw European ex UK equities return 2.8%.
Political and economic challenges in Europe
After a sluggish first half of the year, hope returned to China’s equity markets in September as Beijing revealed a coordinated stimulus plan. China’s policymakers announced a fiscal and monetary stimulus package, property sector support, and an easing of regulatory restrictions. This saw Chinese equities rise by 23.1% in September alone (source: FactSet as at 31 December 2024), and end the year up 21.8% overall.
Optimism in China
Following its pivot in late 2023, the Fed made three consecutive interest rate cuts in 2024. This reduced the effective Federal Funds Rate from 5.5% down to 4.5%. Elsewhere, the Bank of England held the base rate at 4.75% in December after two cuts earlier in the year. The ECB cut interest rates four times in a row, bringing the deposit rate down to 3%. Despite this rate cutting cycle, bond returns were disappointing in 2024. US Treasuries were broadly flat, UK gilts were down 4.1%, whilst global corporate bonds fared a little better returning 3.3%.
Rate cuts continue
Source: Quilter Investors, Federal Reserve Bank of St Louis Fred Economic Data, Bank of England Database, and European Central Bank Eurosystem as at 31 December 2024. Historical interest rates over period 1 January 2015 to 31 December 2024. US is represented by the Federal Funds Effective Rate, UK by the official Bank Rate, and Europe by the ECB Deposit Facility rate.
Central bank rates since 2010
Interest rates to stay higher for longer
Last year has shown us again that the noise that surrounds markets is often not reflective of the performance of the markets themselves. Our role as investors is to take a step back and consider the world from a purely economic and market perspective. We need to be focused on the economic environment, market sentiment, and corporate earnings – everything else is just noise.
Investment lessons
Treasuries are US government bonds. They are issued by the US Treasury.
Gilts is the name given to bonds issued by the UK government.
Conversely, our optimism came from the knowledge that inflation was returning to more normal levels, the pivot by the US Federal Reserve ('the Fed') late in 2023 would be favourable for equities, and the resilience of the global economy suggested that recessions were not an immediate concern. As the year played out, the United States avoided a recession, the eurozone and the United Kingdom experienced only minor economic downturns, and China gained momentum. Although market volatility occasionally spiked, the predominant narrative of 2024 was one of growth, significantly driven by structural themes such as the rapid advancement of new technologies.
As we enter 2025, the investment landscape has fundamentally changed compared to that which faced investors a year ago.
The White House will soon be re-occupied by Donald Trump, the Labour government in the UK is finding its feet, and growth issues in Europe and market volatility in China remain. Against this backdrop, Lindsay James, Investment Strategist at Quilter, looks at the outlook for investors in 2025.
Donald Trump inherits a strong economy with rising real wages, falling interest rates, and ongoing technological innovation. His policies of lowering taxes and cutting regulation are expected to support growth rates, which have already surprised investors with their resilience. The protectionist nature of his policies, shielding the domestic US economy by introducing tariffs, is also likely to help the US industrial heartland in the near term. This is something that is expected to support the broadening out of earnings growth away from the Magnificent Seven to the wider market over the coming year.
US: Looking good, but risks are appearing
US earnings growth broadening out
A tariff is a tax imposed by the government of a country on imports or exports.
Volatility is the extent and speed of change in the value of a financial security such as a bond or equity. The greater the movements in the price of a security, and the shorter the period of such changes, the higher its volatility. The higher the volatility of an asset, the more unpredictable and extreme its price movements.
Investment Strategist
Quarterly earnings growth (year-on-year) of 500 largest US companies
Source: BNY Mellon and FactSet as at 30 September 2024. *The Q3 2024 data is an estimate and the remaining quarters are projections. Projections are based on FactSet net income scorecard for Magnificent Seven vs the other 493 of the 500 largest companies by market capitalisation in the US.
However, Trump’s increasingly isolationist policy, dominated by trade tariffs and tax giveaways, is not without risk. His policies will likely see US government debt levels rising, with longer-term risks for inflation. At the same time, the International Monetary Fund (IMF) expects lower real GDP growth of 2.2% in 2025, down from 2.8% in 2024. Against this backdrop, the US Federal Reserve ('the Fed') will want to proceed with caution, whilst investors must remain vigilant against inflationary risks.
Europe: Room for improvement
The election of Trump and his continued threats of US tariffs on goods exported from Europe has led to lowered expectations for European corporate profitability in 2025. Europe also faces other challenges. Germany is continuing to struggle with high energy costs and increased competition from China and the growth of its economy is almost stalling as it heads towards early elections. Elsewhere, France is dealing with ongoing political instability and the tightening shackles of reduced government spending. However, it is not all doom and gloom. The European Central Bank (ECB) is expected to make further cuts to interest rates as we move through the year. Also, inflation is now back at the target level. As a result, there is scope for an improving backdrop to appear later in 2025.
In a polarised world, the UK is seeking closer ties with the EU while also maintaining significant trade with the US, which is still its largest trading partner. Like in the EU and the US, tariffs on exports will be a serious risk to growth in the UK. However, government spending is frontloaded in Labour’s five-year term, so 2025 should benefit from a pick-up in investment. Whether this growth can be sustained will depend partly on the ability of corporates to follow suit and spend, but business confidence is low due to recent pressures from the Autumn Budget. However, earnings are expected to begin to recover in 2025, potentially aiding the UK equity market despite these ongoing challenges.
UK: Potential for growth
Real GDP growth (year-on-year)
Source: World Economic Outlook, IMF as at October 2024. *The 2024 and 2025 data are projections.
Global growth expected to remain stable
Chinese equities performed well in 2024 but remain volatile. China policymakers have signalled they want to support the faltering and uneven economy. However, their actions have not reached the pockets of consumers. More targeted stimulus may be announced once there is better clarity on the expected impact of US tariffs. This is undoubtedly a challenging backdrop. However, the region’s advanced manufacturing is growing in strength. One example of this is Chinese automakers, which now account for half of the top 20 electric vehicle brands by global sales. Attractive investment opportunities are likely to remain, even if investors may have to wait a little longer for a broader, sustained market recovery.
China: Reasons to be cheerful
The higher starting point for bond yields compared to much of the past decade offers scope for a fixed income rally. This may happen if growth falters, or geopolitical risks rise. However, because of the potential for further spikes in inflation and stretched government finances, investors must diversify beyond traditional fixed income. This could involve including real assets that can offer better protection. Alternatives offer a raft of potential candidates, such as property and infrastructure funds, and continue to present attractive prospects for investors.
Fixed income: Alternatives exist
Overall, the outlook for markets in 2025 paints a picture of uncertainty. However, this uncertainty can present opportunities for active investors. It enables those with strong research processes to create an analytical edge over their competitors. Using this insight, they can position their portfolios to reflect their views before markets have fully priced them in.
Uncertainty creates opportunities
Earnings growth is a measure of the increase in a company's income over a particular period.
The Magnificent Seven is a term used to describe Amazon, Apple, Alphabet, Meta, Microsoft, Nvidia and Tesla.
Inflation is the rate of increase in the price of goods and services. For most countries, it is based on a basket of goods and services that are representative of the cost of living. Inflation increases the cost of goods and services but decreases the real value of cash savings and future bond payments.
GDP growth compares the year-on-year change in a country's economic output to measure how fast an economy is growing.
Yield is a measure of the income an investment delivers. It is calculated as a percentage of either the original purchase price, or the current market value of the asset in question.
Fixed income is the general term used to describe bonds and bond-like financial instruments. In most instances, the terms fixed-income, fixed-interest, and bonds are interchangeable.
Real assets are physical assets with intrinsic worth. They include things like real estate and infrastructure assets, land, natural resources, commodities, and precious metals. They tend to be more stable, but less liquid, than financial assets such as equities and bonds.
Alternatives include non-standard asset classes, such as commodities, renewable energy, infrastructure, collectibles, as well as strategies that invest in traditional asset classes such as equities and bonds by using derivatives. The latter are known as hedge funds.
We have harnessed the expertise of a selection of our investment partners to bring you their specialist insight on the outlook for some of the key asset classes and regions.
UK equities
European equities
Japanese equities
EM equities
Fixed income
European equities Our outlook for European equities in 2025 centres around what we consider to be the most pressing issues for the subset of companies we find interesting. Making macroeconomic forecasts is notoriously difficult, so we continue to focus on immersing ourselves in company research, visits, and management interviews. We expect great companies to continue to be more stable and predictable than the changing world. As President Trump returns to the White House, European companies are likely to face potential trade tariffs and pressures on global supply chains. We believe that the strongest and highest-quality companies will find it easier to optimise their supply chains. Our definition of high-quality companies is those that have pricing power on their side. This means they can adjust prices without causing any meaningful effect on sales volumes allowing them to sustain their margins and profitability. We will be on the lookout for how quickly costs are changing. If increases are too rapid and too high, they are tough to pass on to consumers. We think that companies with a strong market position, good pricing power, and attractive barriers to entry have the inherent financial strength and flexibility to respond to any range of macro scenarios that might occur next year.
Investment adviser to the Quilter Investors Europe (ex UK) Equity Growth Fund
Thorsten Winkelmann
US equities US equities had another strong year in 2024. Returns have been concentrated within the Magnificent Seven cohort during this period. However, the second half of 2024 saw broader market participation. While conviction remains in the broadening out of leadership across the market-cap spectrum, active management will be key amid heightened market expectations, with company fundamentals driving returns. We are focused on high quality growth companies with solid, under-appreciated fundamentals relative to an increasingly concentrated index. We believe there are differentiated opportunities outside the Magnificent Seven, and in companies further down the market cap spectrum with more modest expectations. These companies span a variety of sectors across a range of open-ended opportunities such as manufacturing and power infrastructure in industrials, to weight loss drugs and robotic surgery within healthcare. While we still have conviction in the secular growth opportunity within artificial intelligence (AI) we are selectively reducing exposure given the potential for AI capital expenditure growth to slow amid increased scrutiny on the return of investment.
Investment adviser to the Quilter Investors US Equity Growth Fund
Felise Agranoff
UK equities The equity market faces significant uncertainties going into 2025. The policies of the Trump administration around tariffs, immigration, and climate change risks putting downward pressure on economic growth outside of the United States and upward pressure on inflation. China is in the early of stages stimulating its domestic economy, but the measures announced so far are unlikely to improve medium term prospects. The conflicts in Ukraine and the Middle East rumble on. And in the UK, the budget increased National Insurance contributions for employers potentially leading to higher prices and job cuts as companies seek to mitigate the impact on profits. The UK equity market is exposed to all these factors to some degree given the geographic diversity of UK companies. However, there are some factors working in the UK’s favour. While the Budget disappointed, the government has an agenda to reduce planning constraints which, along with their spending plans, should underpin growth. The UK consumer is also in reasonable health with real wages growing and a high level of savings. Importantly, the UK stock market is cheap, trading at a discount to other developed markets and its own history, giving scope for progress should the growth and inflation environment prove benign.
Errol Francis
Investment adviser to the Quilter Investors UK Equity Fund
US equities
Asia Pacific equities
Japanese equities Japan’s evolving macroeconomic landscape is likely to continue to drive investor sentiment in 2025. After decades of deflation, it is price rises and wage hikes that are becoming the norm. Interest rates may rise as the Bank of Japan continues to normalise monetary policy. However, the development that matters most for equity investors, in our view, is the ongoing corporate reform story. In the past decade, Japanese companies have been transformed – there is a greater focus on generating returns on investment and, importantly, delivering returns to shareholders, either in the form of dividends or share buybacks. As more and more Japanese companies are embarking on this self-improvement journey, we believe the corporate reform story is far from finished. Over the next decade, we think there is a plausible case that Japanese equities could deliver attractive mid-teen returns, driven by earnings growth, dividend growth, and share buy backs. Although this transformation has already drawn global investors back to Japan and the market has rallied, we still believe that Japanese equities represent a strategic long-term opportunity. Given the uncertain macro backdrop, there may be bumps along the way, but we remain excited about the opportunities in Japan for active, engaged stock pickers.
Investment adviser to the Quilter Investors Japanese Equity Fund
Carl Vine
Asia Pacific equities We believe Asia offers exciting investment opportunities and diversification benefits. In 2024, global interest rates were reduced, corporate earnings improved, and markets were boosted by continued economic growth in India and the artificial intelligence (AI) supply chain. This made Asia Pacific equities more appealing compared to investments like bonds, reducing the extra return investors usually expect for taking on more risk. We are optimistic about Asia's potential in 2025 due to companies’ strong earnings growth and attractive levels of market valuations. Healthy business conditions and China's stimulus measures add to the positive outlook. Because stocks across Asian markets are priced very differently to their regional counterparts, and companies may be focusing on giving more back to shareholders through share buybacks, it could be a good period for active managers. North Asia's top manufacturing and technology companies are key players in AI growth. China, India, and Southeast Asia are driving domestic consumer demand, especially in internet and e-commerce. Rising incomes and a growing middle class benefit financial companies, while commodity producers are crucial for the energy transition. Despite high valuations in Indian equities and Taiwan technology, we believe there are still great opportunities in consumer-related sectors like e-commerce, internet, financials, leading manufacturers, and commodity producers.
Investment adviser to the Quilter Investors Asia Pacific (ex Japan) Large-Cap Equity Fund
William Lam
Fixed income While the anticipated pace of interest rate cuts is less clear for the US and UK than it is for the Eurozone, our expected backdrop of falling rates and global growth at a similar level to 2024 would be a positive environment for fixed income investors. Credit should continue to outperform government bonds in the medium term. Valuations have certainly compressed, and there is a tug-of-war of sorts between high overall yields and low spreads for asset allocators. However, the fact that yields are high should keep demand for fixed income robust. At the same time, as is typically the case when spreads are below their long-term averages, there is not much premium on offer for moving down the credit rating spectrum to lower-quality credit. Similarly, there isn’t much additional spread on offer for venturing into longer-dated credit compared to shorter-dated credit. As a result, we think the best risk-adjusted returns in 2025 will be found in portfolios with an overweight in credit, but a high average credit rating and relatively low credit spread duration.
Investment adviser to the Quilter Investors Dynamic Bond Fund
Eoin Walsh
Read the views from Jupiter, J.P. Morgan, AllianceBernstein, M&G, Invesco, Allspring, and TwentyFour by clicking on the buttons below.
Visit our news and views page to keep up-to-date with the latest insights from the Quilter Investors team.
Emerging markets equities We expect emerging markets to outperform in 2025, primarily driven by strength from China and India. India's robust economic growth is fuelled by structural growth, robust capital expenditure (CapEx) cycles, and strong domestic flows. The Bharatiya Janata Party-led coalition also ensures policy continuity, focusing on CapEx, the reduction of public debt, and job creation. However, due to elevated valuations, we are positioned selectively. Despite short-term uncertainties, our optimism around China is supported by fiscal and monetary stimulus, property sector support, and easing regulatory restrictions. Investment opportunities in technology innovation, green development, industrial upgrades, as well as a consumer recovery, should also support Chinese equity returns. We also believe emerging markets serve as enablers of artificial intelligence (AI), which should be favourable for technologically advanced countries in Asia, and materials-rich countries in Latin America. In a world of increasingly higher tariffs, many emerging market countries also offer competitive advantages, such as the low cost of labour and high domestic consumption. Overall, we view emerging markets as an attractive asset class going forward due to improved political stability, economic momentum, accommodative policies, and attractive valuations. In addition, emerging markets offer diversification benefits and are under-owned by many investors.
Investment adviser to the Quilter Investors Emerging Markets Equity Income Fund
Alison Shimada
Market capitalisation, referred to as 'market cap', is the size of a company based on the total value of all the shares it has issued to shareholders.
Growth stocks tend to be companies that derive their value from the rate at which they are expected to grow their future earnings. Generally, they pay limited dividends as they reinvest their profits to grow their businesses.
Capital expenditure, referred to as 'CapEx', is the money spent by a company to buy assets.
Deflation is an ongoing decline in the price of goods and services. It can arise due to gains in production but is more commonly associated with a contraction in the supply of money and credit in an economy. Deflation is the opposite of inflation.
Monetary policy refers to the tools and actions, such as interest rate changes, taken by a central bank to influence the cost of borrowing and money supply in its economy. It is normally described as accommodative or restrictive.
A share buyback is when a company buys back its own shares from the open market. This reduces the number of shares in issuance, pushes up the value of the remaining shares and is a way of increasing shareholder returns.
Dividends are the payments made when companies distribute their profits to their shareholders.
Active management is a traditional investment approach. The manager actively selects and trades the holdings within their fund or portfolio to take advantage of investment opportunities or to minimise potential losses. It is the opposite of passive management.
A share buyback is when a company buys back its own shares from the open market. This reduces the number of shares in issuance, pushes up the value of the remaining shares, and is a way of increasing shareholder returns.
Active management is a traditional investment approach where the manager actively selects and trades the holdings within their fund or portfolio to take advantage of investment opportunities or to minimise potential losses. It is the opposite of passive management.
Diversification is the process of investing in a range of different assets or asset classes with the aim of improving performance and/or reducing the overall volatility, or the investment risk, of a fund or portfolio.
Emerging markets are developing economies that are in the process of transitioning into becoming developed markets by evolving their industries, infrastructure, and political and legal systems.
Structural growth refers to dramatic changes in the way a country, industry or market operates because of major economic developments.
Capital expenditure (CapEx) is the money spent by a company to buy, maintain, or improve fixed assets such as buildings, machinery, and land.
Credit is another term for fixed income securities issued by companies.
Yield is a measure of the income an investment delivers. It is calculated as a percentage of either the original purchase price or the current market value of the asset in question.
Credit spread is the additional yield offered by a corporate bond (issued by companies) versus a government bond of the same maturity and currency. This compensates the bondholder for the added risk that the company may default on its debt obligations.
Credit rating is the assessment of a government or a company’s creditworthiness, either in general terms or with respect to repaying a particular debt or financial obligation. Bonds issued by governments and companies are rated by credit ratings agencies on a letter-based system ranging from AAA to D. Those with the best credit rating have the highest level of credit quality.
Duration is a measure of the sensitivity of a bond’s price to changes in interest rates. It is measured in years, so the longer the duration in years, the more sensitive the underlying asset is to changes in interest rates. Low, or short, duration assets are less sensitive to rate changes.
The active vs passive debate continued apace in 2024 with the performance of the Magnificent Seven driving passive fund flows and returns.
With the lower management costs of passive funds and their recent success, it is not surprising that the role of active management is under the microscope. Sacha Chorley, Portfolio Manager at Quilter Investors, looks at some key areas where active management proves its worth.
Both passive and active managers have their roles to play in helping investors to achieve good outcomes. Passive investment management offers a low-cost way to track the performance of a market or index. In contrast, one of the key benefits of active management is that active managers can take advantage of the subtleties of the market. Let us consider the healthcare equity sector. There are a wide range of passive investments that track the sector, and they provide a cost-effective way of accessing its defensive characteristics. However, when looking at active managers, we have identified two broad styles of investment approach that deliver different results: the ‘scientist’ approach and the ‘business’ approach. The ‘scientist’ approach seeks companies that have advantages in their technologies, such as transformative drugs or new medical devices. These are expected to generate material revenue and earnings growth. Meanwhile, the ‘business’ approach focuses on the financial profile of companies and picks those that have attractive structural characteristics. For example, an ability to reinvest their profits to then compound and deliver long-term earnings growth.
Active management can help manage risk and maximise opportunities
Portfolio Manager
With a good manager, both approaches can generate strong excess returns but the ride, or the shape of returns, will be markedly different. The ‘scientist’ approach is likely to fare better in a ‘risk on’ environment and serve investors well when markets are buoyant. However, if you were allocating to gain defensive exposure to the healthcare sector, then the ‘business’ approach could be the better choice. We can see this in action if we compare two actual healthcare strategies – one that employs the ‘scientist’ approach and one that uses the ‘business’ approach. Over the past ten years, global equities fell by 19.8% on average from peak to trough during periods of decline. Over the same period, the healthcare sector was down by 11.6% on average, showing its defensive qualities. The ‘business’ approach adds even more downside defence, down by an average 9.8% during the same period. The strategy with the ‘scientist’ approach fared worse, down 15.0% on average during this period. This is a clear example of the type of differentiation that is available between active managers’ strategies in the healthcare sector, but there are opportunities for differentiation within all asset classes.
Choosing the right sector, but the wrong style, can affect returns
Average trough returns when global equities are falling
Past performance is not a guide to future performance and may not be repeated. Source: Quilter Investors and FactSet as at 31 December 2024. Average drawdown, rounded to one decimal place over period 26 November 2013 to 31 October 2024. Global equities is represented by the MSCI AC World Index and healthcare equities by the MSCI AC World Health Care Index. The healthcare strategies are two funds within the FactSet healthcare universe and are provided for illustrative purposes only.
Making the right choice matters
The first observation to make would be about the Magnificent Seven. While earnings in these companies have continued to be strong, we would note the decrease in their earnings growth. This raises the possibility that their extremely high valuations can no longer be justified. It is worth noting that most active large-cap stock pickers have a bias away from these companies and could be well placed to exploit the next tier of large-cap stocks.
Active stock pickers steer away from the Magnificent Seven
More generally, we think there is likely to be continued volatility in markets. Interestingly, fundamental metrics are showing more stress, and we have seen a pick-up in geopolitical risk indicators. However, more traditional indicators of volatility are at local lows. Something has to give. We also have a heavily concentrated equity market, where the largest region has high valuations. This is a perfect recipe for higher volatility even without a Trump administration likely to implement globally disruptive policies.
Volatility lies ahead in 2025
Geopolitical Risk (GPR) Index
Source: (LHS) Geopolitical risk index, matteoiacoviello.com/gpr.html as at 29 November 2024. GPR Index over period 1 January 1994 to 29 November 2024. The index is calculated by counting the number of articles across ten newspapers related to adverse geopolitical events each month (as a share of the total number of news articles). (RHS) Quilter Investors and Macrobond as at 29 November 2024. One year moving average of regional volatility indices over period of index start date (shown in brackets) to 29 November 2024. US is represented by the CBOE S&P 500 Volatility Index (31 December 1991), Australia by the S&P/ASX 200 VIX Index (4 August 2010), Europe by the VSTOXX Index (31 December 1999), and Japan by the Nikkei Stock Average Volatility Index (1 January 2010).
Risk indicators increasing
Volatility indices (one-year moving average)
The divergence shown in the two charts above may present an opportunity to managers who can benefit from this volatility. Alternative strategies like trend followers or discretionary macro managers often perform better in volatile markets. Likewise, equity stock pickers with a bias towards company and business durability could outperform. We also understand that when it comes to investing for the long term, the journey is as important as the destination. So, one last important thing to mention is the ability of active managers to manage any bumps in the road. And 2025 could well be a very bumpy road!
The journey is as important as the destination
Volatility indicators at local lows
Source: Abobe Stock, gguy - stock.adobe.com
So, we know that the style of manager matters, but as we begin 2025, what are the investment styles that we should be looking for?
A central bank is the institution tasked with managing a country’s currency on behalf of the government. It enforces monetary policy by setting interest rates that are appropriate for its economy and its mandate as a central bank.
During 2024, more central banks reduced interest rates, but the performance of government bonds was uninspiring.
With central banks seemingly set to be more accommodative in 2025 and further reductions of interest rates expected, CJ Cowan, Portfolio Manager at Quilter Investors, considers the outlook for bonds and what this could mean for investors.
An underwhelming 2024
Despite the rate cutting we saw last year, the returns of government bonds were disappointing and roughly in line with their yields at the beginning of 2024. High-yield bonds fared better but, while they do carry some interest-rate risk, they are often considered as equivalent to half equity in terms of risk and reward.
A disappointing year for bonds
Bonds and global equity returns in 2024
Over the past 50 years, the long-run average GDP growth rate has been a good valuation anchor for US Treasury yields. However, since 2000 it has been their ceiling rather than their mid-point. The chart below shows that when Treasury yields have deviated significantly from prevailing GDP growth rates, they have reverted once again in the following years. A model like this is most useful to highlight major mispricing such as in the 1980s and in the aftermath of the pandemic in 2020. Clearly today is not one of those moments and, as we stand, yields in the US look about right. It is important to remember this is a long-run view and doesn’t mean there won’t be notable volatility over shorter timeframes though.
Current valuations seem fair
Treasury yields and GDP growth (year-on-year)
Yields in line with historic trends
Past performance is not a guide to future performance and may not be repeated. Source: Quilter Investors and Macrobond as at 29 November 2024. US 10-year Treasuries yield and US Nominal GDP growth, year-on-year, 10-year moving average over period 26 March 1958 to 29 November 2024.
Past performance is not a guide to future performance and may not be repeated. Source: Quilter Investors and Morningstar as at 31 December 2024. Total return, percentage growth, rounded to one decimal place over period 29 December 2023 to 31 December 2024. Global equities is represented by the MSCI AC World Index, global high yield by the ICE BofA Global High Yield (GBP Hedged) Index, and global government bonds by the Bloomberg Global Aggregate Government - Treasuries (GBP Hedged) Index.
Bonds tend to perform well at times of weakening growth, falling inflation, and loosening monetary policy, so let’s consider each of those. The International Monetary Fund (IMF) forecast for US real GDP growth in 2025 is 2.2%. This is a reduction on the past two years but still good. Meanwhile, inflation has fallen a long way but remains above the 2% target. The Trump presidency presents upside and downside risks to both inflation and growth. His plans for tax cuts and deregulation should be growth positive but import tariffs will drive prices higher and may restrain global growth.
Low-to-mid single digit bond returns expected in 2025
So, what does this all mean for bond returns next year? We think current market pricing is fair, so the current yield to maturity on US Treasuries is a reasonable baseline expectation. The one certainty as we move into 2025 is change, and that will create opportunities to make active returns through the year. On a more strategic basis, diversification remains the name of the game. With yields still around post-global financial crisis highs, we like the downside defence that government bonds can bring to our portfolios in the case of a growth upset.
Opportunities exist to make active returns
It wouldn’t be a surprise to see some of Trump’s campaign positions watered down. For example, it makes little sense for a universal tariff to be applied to Colombian coffee as the US does not have a domestic coffee industry to protect. Meanwhile, pumping more oil may mask the inflationary effects of tariffs in the near term. Overall, this means we probably aren’t returning to sub-2% inflation rates, but another surge toward double digits also looks unlikely. On monetary policy, expectations for Fed interest-rate cuts have been dialled back once more in response to Trump’s election victory. We see risks of rate rises if inflation comes back, but also risks of steeper cuts if growth falls dramatically.
Source: Shutterstock, Frederic Legrand - COMEO
On monetary policy, expectations for Fed interest-rate cuts have been dialled back once more in response to Trump’s election victory. We see risks of rate rises if inflation comes back, but also risks of steeper cuts if growth falls dramatically.
A lot has changed in the short-term outlook for climate change policy, decarbonisation of industry, and renewable energy.
However, the increased costs associated with extreme weather for individuals and businesses as well as the costs that will result from climate inaction have not. At the same time, government support to address climate change in the US and other countries is waning. Stuart Clark, Portfolio Manager at Quilter Investors, looks at the current decarbonisation landscape and considers the investment case for renewables.
The Paris Agreement aims ‘to limit the global average temperature increase to 1.5°C above pre-industrial levels’. This would require global greenhouse gas emissions to be halved by 2030 and brought to zero by around 2050. The current implementation gap to achieve this in terms of global greenhouse gas emissions is 24 to 27 gigatonnes (one gigatonne equals one billion tonnes). As the chart below shows, the policies and actions currently in place are projected to result in a 2.5-2.7°C temperature increase above pre-industrial levels. Even in an optimistic scenario that the net zero emissions targets of over 140 countries would be achieved, the median warming estimate is still 1.9°C.
Large implementation gap to achieve aims of the Paris Agreement
Greenhouse gases (GHGs) are carbon dioxide, methane, nitrous oxide, and ozone. They account for a tiny fraction of the atmosphere, but they are a critical part of the overall atmosphere composition as they play a significant role in trapping the earth’s heat and warming our planet.
Source: Climate Analytics and NewClimate Institute, 13 November 2024. Copyright © 2024 by Climate Analytics and NewClimate Institute. All rights reserved. GtCO2e is gigatonnes of carbon dioxide equivalent emissions.
Emissions and expected warming based on pledges and current policies
Global temperature increase scenarios
With the clear need for action, a major consideration in the run up to the US election was the impact on decarbonisation and renewable energy policy if President Trump was re-elected. The outcome of the election is now known, and the nominations have been made, such as those for energy secretary, head of the Environmental Protection Agency, and the newly formed Department of Government Efficiency. These do little to suggest that new policies will be put in place to pro-actively encourage a shift to a cleaner economy, either in the form of carrot or stick. Trump’s election follows a turbulent period for investors in the energy transition space. This has been caused by headwinds from higher inflation, higher interest rates, and lower earnings. Hopefully, the rate of inflation will now remain subdued allowing interest rates to gradually lower. Yet, this is not certain given the focus Trump has placed on fiscal easing and tariffs. There could also be further complications for the renewable space in the form of lower energy prices or bottlenecks in supply chains squeezing earnings further. However, one thing Trump is famous for is his willingness to use tariffs to drive forward his agenda. This is an area where one of his favoured policies could deliver a positive environmental outcome. A mechanism like the EU Carbon Border Adjustment Mechanism, which penalises imports that have a higher carbon footprint, could incentivise a lowering of emissions across those more intense imports.
A turbulent period for renewables
Against this backdrop, we now see lower valuations in the renewables space. This adjustment has been significant since the summer of 2020 and has been worsened by the election result. However, it does now offer a more attractive entry point to an area which is still forecast to experience significant growth over time. The growth rate may be a little curtailed by the fall in government projects, but not every project in the US will be dropped and international projects won’t stop. Our conversations with managers in this space have highlighted that electric vehicle and other consumer subsidies may be most at risk alongside offshore wind farms. However, carbon capture and nuclear and hydrogen power could be less impacted. Further to this, certain state-backed regulations and incentives will also continue to drive demand.
Lower valuations present opportunities
We believe the theme of decarbonisation across industries will continue and that market-led dynamics will allow renewables to continue to grow within the energy mix. An active investment approach in this area does not require a regulatory tailwind to drive returns. There are opportunities with companies that can drive earnings growth through a variety of means and have the correct structure to survive and ultimately adapt through periods of political change. While the US election has complicated the picture, we feel the long-term opportunity in conjunction with an active investment approach means the renewables and decarbonisation theme can be an attractive investment opportunity in 2025 and beyond.
Renewables are still an attractive investment opportunity
However, carbon capture and nuclear and hydrogen power could be less impacted. Further to this, certain state-backed regulations and incentives will also continue to drive demand.
Against this backdrop, we now see lower valuations in the renewables space. This adjustment has been significant since the summer of 2020 and has been worsened by the election result. However, it does now offer a more attractive entry point to an area which is still forecast to experience significant growth over time.
