Investing in 2025 amid a changing world order

2024 was the year of elections, and its aftermath will shape geopolitics and economics in 2025 and beyond.

President-elect Donald Trump’s return to the White House in January sets the stage for significant resets in globalisation, multilateralism and functioning economic blocs. Even in the past weeks, fluid political situations worldwide continued unabated, with a brief interlude of an emergency martial law decree in South Korea, followed by the failed impeachment of President Yoon Suk Yeol.

Over the weekend, rebel forces ousted Syrian President Bashar al-Assad’s regime, ending a 50-year dynasty.

For investors, this global geopolitical and economic regime change necessitates a rethink of asset allocation across bonds and equities, public and private markets, and the asset allocation framework itself. There is no better time than now to re-examine, rethink and recalibrate our perspectives about how to reframe investment portfolios to withstand uncertainty in the range of outcomes.

Trump 2.0: US exceptionalism v global challenges for the rest of world

The upcoming fiscal boost from tax cuts and lighter regulations under Trump 2.0 will support US growth and corporate earnings, benefiting US equities and strengthening the US dollar. On the other hand, steep tariffs and tighter labour markets due to immigration policies will stoke US inflation and restrict the Federal Reserve (Fed) from easing in 2025. This may push US Treasury yields higher, posing challenges for duration risk and fixed-income assets.

While US exceptionalism prevails, the rest of the world may respond by re-examining alliances, rewiring supply chains, or retaliating against prospective punitive tariffs.

In Europe, the threat of higher US tariffs and less US commitment to the region’s security may hurt growth and budget deficits. Stalling eurozone growth implies more rate cuts by the European Central Bank to 2 per cent or less, keeping the euro weak. In Asia, US tariffs will likely curb the growth of large exporting nations including China and Japan, forcing governments to take more action to support their domestic economies. Potential rate hikes by the Bank of Japan due to rising inflation risks will limit the pace of the yen’s depreciation.

Regional diversification will be important as India and Indonesia present attractive long-term prospects due to their expanding middle class, rapid technology adoption, and global friendshoring trends. Despite current challenges, we believe there is further upside potential for China as meaningful stimulus measures come through. The Middle East is also expected to leverage its hydrocarbon wealth to foster new growth sectors and increase its global influence.

Supertrends for the next five years

Signified by the five elements (wuxing) in Oriental philosophy, Bank of Singapore’s Chief Investment Office (CIO) and CIO Global Advisory Council believe these five key supertrends will shape global geopolitics and economies over the next five years.

The changing world order (fire): We expect elevated government debt levels post-pandemic to be exacerbated by government spending required to shore up defence amid geopolitical shifts, healthcare for ageing populations and energy to combat climate change. With rising trade frictions and the reshaping of supply chains, we expect a higher resting heart rate for inflation.

US assets seem relatively resilient against an increasingly geopolitically tense environment, while long-term prospects for Europe and Japan (both large exporting economies dependent on energy imports) are likely to be impacted. The rest of the world may also suffer from US tariffs, particularly China and Mexico. If the global economy starts splitting into US and China-led blocs, then supply chains would be hit, raising inflation further.

Activating asset allocation (water): Heading into 2025, we maintain a broadly risk-on stance in our tactical asset allocation, but a nimble approach to markets remains vital amid the uncertain global changes ahead. We hold an overweight position in equities, with a recent upgrade of US equities to “Overweight” on the back of the anticipated boost to corporate earnings in President Trump’s second term. We also hold an overweight position in Asia ex-Japan equities, and neutral positions in Europe and Japan.

With inflationary risks and potentially higher yields, we have an overall underweight stance in fixed income given our cautious view on duration. Active management of duration and credit risks in fixed-income portfolios will be critical in a volatile interest rate environment.

We are underweight on US Treasuries and developed-markets (DM) investment-grade (IG) bonds, but hold neutral positions in DM high-yield and emerging-market bonds. We continue to favour gold, which is an effective hedge against risks of resurgent inflation and concerns of fiscal sustainability. Within private markets, we see capital allocation moving beyond private equity and real estate, into infrastructure, private credit and real assets.

Bringing AI into real life (metal): AI is moving from concept to reality, as companies prioritise incremental budgets towards AI-related capital expenditure. GenAI (generative AI) spending is forecast to increase at a 73 per cent compounded annual growth rate over the next four years, bringing global GenAI core IT spending from US$16 billion in 2023 to an estimated US$143 billion by 2027. We also see AI use cases starting to proliferate, with real-world applications concentrated around (i) boosting internal employee productivity; (ii) revenue opportunities via customer-facing applications; and (iii) customer experience and engagement.

Powering ahead (wood): The power-hungry nature of AI developments, combined with the urgency of energy transition, is driving significant infrastructure investments globally. It is estimated that about US$4 trillion of capital needs to be deployed each year to fight climate change. Against this backdrop, we favour established profitable companies with exposure to clean energy and electric vehicles (EV) that enjoy significant competitive advantages in their industries.

Enablers of the global energy transition, including companies focused on energy efficiency and smart-grid infrastructure, as well as those producing upstream metals and minerals may benefit. Traditional energy players may become part of the solution with their expertise in managing complex energy systems, policy shifts and technology advancements in bio-energy and carbon capture. The proliferation of AI use cases could drive significant growth in next-generation data centres powered by renewable energy to service the digital and AI ecosystem.

Living 2.0 (earth): The proportion of the world’s population over 60 years of age is projected to nearly double from 12 per cent to 22 per cent between 2015 and 2050, and this trend is even more pronounced in developed economies. An ageing global population – due to falling fertility rates and rising life expectancies – will have profound implications for capital allocation.

As populations age, the need for retirement savings and income will grow, driving a “reach for real yield” as investors seek out investment assets with higher risk-adjusted returns to fund longer retirements. As we live longer and better lives, consumption in healthcare, leisure and experiences will rise in tandem with an ageing population.

Labour markets will be impacted by the ageing trend, as working-age populations shrink, and wages rise to compete for scarce talent. This will spur investment in automation and productivity-enhancing technologies, including robotics and AI. Declining populations will drive the need for reskilling in the face of labour shortages, along with the rise of automation.

The writer is global chief investment officer, Bank of Singapore