Market Outlook 2025: Strategic Rivalry or Geo-Fragmentation?
This markets outlook piece provides university students and CFA candidates, who have a desire to have a career in investments, an overview of what’s in store for 2025. It is not intended to be a forecast but for you to understand the current market dynamics and come up with your own view.
Following a strong 2023, global markets enjoyed another stellar year for risk assets in 2024. Investor optimism around artificial intelligence (AI) lit a fire under US equities to be the standout performer among other global markets. Inflation continued to moderate globally, spurring central banks to reduce interest rates. Yet ongoing strength in the labour market and resilient households put US rates on a divergent path from the rest of the world. All the while a bumper year of democratic elections across the globe has redefined policy dynamics and the world order. As we look ahead to 2025, these factors set the scene for three major themes that are worth considering in forming your own market outlook.
Trumponomics 2.0
President Trump has returned to the Oval office on a mandate to put ‘America First’. Whether this mandate translates to placing the US atop of a unipolar world is a key question for investors to ruminate. Tariffs, the posterchild of Trumponomics, have sent ripples of volatility through markets. And while Trump’s ‘art of the deal’ tariff negotiations have resulted in a Nash equilibrium with Canada and Mexico, it remains to be seen whether this prisoner’s dilemma will resolve similarly when put to Europe and/or China. How this develops will have an important bearing on where the world lands on the global cooperation vs. fragmentation spectrum and its associated impacts on global inflation and policy direction.
The AI Arms Race
AI is the latest battleground in the global technological arms race. The burgeoning of the Magnificent 7 (Microsoft, Amazon, Meta, Apple, Alphabet, Nvidia and Tesla) share prices and valuations highlight the market’s faith in the continuation of US exceptionalism in the AI forefront. This thesis was tested when DeepSeek hit the scene, with its generative pre-trained transformer (GPT) performance placing it as a contender among its US peers albeit at a supposed fraction of the cost. Putting aside any debate on who has what edge in the AI arms race at this stage, the incidence serves as a poignant reminder that narratives aren’t the sole pillar of an investment case, and that valuations and earnings fundamentals remain a core foundation for what must be considered. Technological progress is an important cornerstone for productivity and growth however the importance of risk management cannot be understated.
Australia Stuck in the Middle
The US-China competitive dynamic places Australia in an interesting middle ground, particularly through its currency – an important risk management tool in an Australian-based investor’s toolkit. The AUD’s long history as a pro-cyclical currency has meant that foreign currency exposure is a natural hedge to growth risk in investor portfolios. However, the double whammy of US exceptionalism and weakness in the Chinese economy have translated into a weaker AUD. Further yet, the RBA’s decision to cut interest rates to 4.10% at the February meeting while concurrently pushing a hawkish tone has introduced further complexity in considering the potential path of the AUD. The question of whether the AUD can still perform as a reliable risk hedge with its current valuation remains a point of caution for investors in their portfolio construction.
Ekagra Gupta, Portfolio Manager, Investment Strategy
Australian Retirement Trust
