A sceptic’s guide to 2025: three risks to monitor
There are paths towards better investment outcomes, ensuring one gets and stays invested, rather than retreating to safe havens
OUR view of financial markets in 2025 is an optimistic one. We expect the US economy to avoid a sharp growth downturn, despite the multitude of events ahead of us.
This, in turn, is likely to result in solid gains for global equities and high-yield bonds, even if the path is not as smooth as the one in 2024.
As with the start of each year, though, there is never a shortage of things to worry about.
While these concerns should not derail the core of a portfolio, building sensible investment portfolios means incorporating strategies to address the range of things that could go wrong.
Specifically, we would focus on three potential risks to our view: how Donald Trump implements his policy agenda; how Chinese policymakers choose to respond to US tariffs and domestic growth challenges; what path inflation will take during the year.
How to think about foundation portfolios
We are of the view that the US economy is likely to achieve a soft landing, with a significant chance that growth ends up stronger than expected. As a result, this creates a positive backdrop for the corporate earnings outlook.
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This is why we see a strong case to be overweight global equities over bonds and cash, with a relative preference for the US within equities.
US, euro area and Asian high-yield bonds should also benefit from this backdrop, offering an opportunity to generate income from our outlook.
Trump policy sequencing risk
The first potential challenge to our outlook stems from Trump’s policy priorities.
His proposals thus far offer a mixed bag of positives and negatives. His tax and spending policies support a positive earnings outlook for businesses, but his tariff proposals likely pose a challenge.
The speed and sequencing of policy implementation are likely to be key to whether risk assets are able to continue rising or face a period of volatility.
A benign view would argue his administration focuses on growth-supportive and deficit-cutting measures first, while introducing more growth-negative but popular measures – such as tariff and immigration – in phases.
However, a “maximum pressure” approach means markets may start to worry about whether tariffs end up disproportionately imposing a growth penalty, or whether immigration curbs reignite inflationary pressure.
We believe investors can mitigate these concerns with two approaches. The first approach is via an overweight in gold. While the main driver of our positive view on the precious metal is central bank demand, gold can help mitigate short-lived equity volatility.
The second is via a greater focus on domestic sectors, such as small caps in the US, which should ideally be less directly affected by tariffs.
China’s policy response risk
The headwinds to stronger economic growth in China are now well-known, with US tariffs a looming additional headwind.
Policy support has already been forthcoming from the monetary authorities, with lower interest rates and several other targeted policies.
However, markets have been clamouring for direct government support to stimulate consumer spending. How strongly Chinese policymakers respond to any threats of US trade tariffs is likely to be another key focus for markets.
We believe investors can mitigate the risk via several approaches.
Firstly, they could take a more focused approach to Chinese equities markets, with sectors that are likely to be less directly affected by trade measures. Our preference is for the state-owned enterprise sector, which pays high dividends.
Secondly, they can tilt towards asset classes that are more likely to benefit from any further stimulus (onshore over offshore equities) or from stability rather than strong growth (high-yield credit over equities).
Thirdly, they can diversify across other opportunities within Asia or emerging markets. For instance, Indian equities offer greater growth visibility, albeit at higher valuations.
Inflation risk
Perhaps the biggest risk from stronger-than-expected economic growth is a rebound in inflation, because of the strong growth itself.
Under such a scenario, inflation expectations could reignite, limiting room for the US Federal Reserve and other major central banks to cut rates. At the extreme, the resulting rise in bond yields could trigger a pullback in equity markets.
A mix of strategies that typically perform well across a wider spectrum of inflation outcomes is likely one solution here.
For moderately high inflation, equities themselves can offer reasonable protection, given corporate earnings benefit from higher pricing power.
The worst-case scenario of a return to very high inflation readings, though, would pose the risk of equities and bonds falling at the same time.
The lesson from 2022 is that a mix of real asset, such as gold and other major commodities, and alternative strategies – both liquid and private assets – can help to provide the portfolio diversification that investors seek when bonds are no longer able to do so.
We would seek to include both in a well-diversified portfolio to mitigate this scenario.
A healthy dose of optimism
It is tempting to think about investment outcomes in a binary sense. For example, an optimistic scenario such as our own base case, which translates into a large equities position, or a risk scenario driving one to the perceived safety of cash.
However, we believe there are routes to achieve better investment outcomes.
In 2025, our base case remains optimistic, where extended US economic growth helps sustain gains in equities for the third straight year.
We would monitor the three above risks closely as we progress through the year. Investors can prepare for them by building in diversified assets to help mitigate the impact of the risk scenarios.
This diversified approach, we believe, is a better way to deal with the risks posed by a sceptical view of 2025, ensuring one gets and stays invested, rather than retreating to safe havens.
The writer is chief investment officer for Africa, Middle East and Europe, Standard Chartered Bank’s wealth solutions unit
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