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2025 Outlook: Preparing for a New World Order that Started to Unfold Even Before the US Election
By: Adam Farstrup, Schroders
Many prognosticators are gauging what “Trump 2.0” will bring for financial markets in the new year. The policies of the new administration will significantly impact the US and global economy, presenting considerable opportunities for investors. However, the likelihood of continuing geopolitical tensions and trade wars necessitates that pension plans ensure proper diversification to maintain resilient portfolios through 2025.
Many prognosticators are gauging what “Trump 2.0” will bring for financial markets. The policies of the new administration will significantly impact the US and global economy, presenting considerable opportunities for investors. However, the likelihood of continuing geopolitical tensions and trade wars necessitates that pension plans ensure proper diversification to maintain resilient portfolios through 2025. Many prognosticators are gauging what “Trump 2.0” will bring for financial markets in the new year. The policies of the new administration will significantly impact the US and global economy, presenting considerable opportunities for investors. However, the likelihood of continuing geopolitical tensions and trade wars necessitates that pension plans ensure proper diversification to maintain resilient portfolios through 2025.
A move away from the post-GFC regime
Before the US elections results, a shift was already underway in the global economic regime. The post-Global Financial Crisis (GFC) environment of tight fiscal policies, zero-interest-rates, and liberalized trade had already come to an end. This shift became evident post-pandemic as fiscal spending increased and high inflation brought a return of high interest rates. In the 2024 Schroders Global Investor Insights Survey (GIIS), 82% of US pension plans said high interest rates will influence their portfolios' performance over the next 12 months, and 80% noted central bank policies will have a key impact.
The call for more tariffs reflects another departure from globalization, a trend that had already begun with tariffs imposed during President Trump's first term, which the Biden Administration did not reverse.
A soft landing likely with a return to moderate growth
Today, the economic backdrop is benign. Inflation is moving in the right direction, and interest rates are falling in the US and Europe. We expect a soft landing, as central banks' efforts to curb inflation deliver slower growth without a recession. We also believe economic growth will reaccelerate as we move through 2025.
Recent gains in the equity market have primarily come from the “Magnificent Seven” tech stocks, which accounted for over 50% of the US equity market's return in the first half of 2024. While the concentration of the US equity market has peaked, signs suggest the market is ready to broaden, supported by President Trump's promises to cut regulations and reduce corporate tax rates.
Overall, we are seeing strong interest in international equities among US public pensions. This interest seems based on the expectation that, after such an extended period of outperformance from US stocks, returns for both US and international will revert to their long-term averages. Among those who prefer to avoid a top-down call on the US, there is increased interest in global equity strategies for the combined exposure to both US and international stocks.
Tariffs' impact and inflation risks
Increased tariffs may cause more US companies to onshore their supply partners, boosting the US economy. While other countries may suffer from the lost trade, we expect governments will increase fiscal spending to help offset the negative impact of fewer trading opportunities with the US. We believe these developments will generate positive returns for equities in 2025, and investors may be well served by looking beyond the stocks that have been recent winners.
Still, challenges loom on the US economic front. Relaxed regulations, corporate tax cuts, and tariffs that promote onshoring could make the US economy “too hot.” The loss of workers from stricter immigration policies could add to the inflationary pressures and restrict the US Federal Reserve's ability to deliver rate cuts.
Fixed income provides income once again
With the return of higher interest rates, fixed income is once again delivering high yields. Even if bonds do not provide much diversification from stocks, they warrant including in portfolios the income they now offer. With fiscal and monetary policy diverging across the globe, there are also more opportunities to gain additional return by diversifying across different countries' bonds and currencies.
Diversification will be critical
While the economic outlook appears favorable, numerous market risks remain. Disruption from ongoing conflicts in the Middle East and Ukraine will continue to impact global markets. Dynamic asset allocation and diversification into commodities like gold and energy will be crucial for resilience amid market turbulence. Furthermore, investments in private markets can enhance diversification by providing exposure to asset classes with distinct return drivers that are often insulated from geopolitical events.
Again, the Schroders GIIS indicates that retirement plan sponsors are responding to these challenges. To enhance diversification, 94% of surveyed pension funds are already investing in, or planning to add, private equity, private debt, and renewable infrastructure. While the right positioning can capitalize on the opportunities in 2025, effective diversification across regions and asset classes will be vital for maintaining portfolio resilience.
Disclosures: All investments involve risk, including the loss of principal. Past performance provides no guarantee of future results and may not be repeated. The views shared are those of the author and may not reflect the views of Schroders Plc or any of its affiliates. Information herein has been obtained from sources we believe to be reliable but Schroders Plc does not warrant its completeness or accuracy. No responsibility can be accepted for errors of facts obtained from third parties. Reliance should not be placed on the views and information in the document when taking individual investment and / or strategic decisions. Any mention of industries or sectors is for informational purposes only and should be interpreted as a recommendation to invest or divest in any company or adopt a particular investment strategy. Schroder Investment Management North America Inc, registered as an investment adviser with the SEC, CRD Number 105820.
Bio: Adam Farstrup is the Head of Multi-Asset, Americas at Schroders, where he manages a team focused on delivering solutions that utilize a risk premia-based approach. He leads Multi-Asset efforts in the Americas, participating in investment discussions and client solutions. Adam has been with Schroders since 2007 and is based in New York. Previously, he served as Product Manager for the Global and International Equity team from 2007 to 2013, communicating investment strategies to clients. From 2003 to 2007, he was the Chief Investment Officer of Multi-Manager Solutions at Rogerscasey, overseeing investment programs. Earlier roles included Director of International Equity Manager Research at Rogerscasey. Adam is a CFA Charterholder and holds a BA in Economics from Muhlenberg College. He is a member of the CFA Institute and CFA Society New York.
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