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Last time, we looked at the factors influencing the outlook for global equity and fixed-income markets in 2025. We conclude our outlook for 2025 with observations about investment themes. Identifying longer-term trends in society and the economy can point to durable sources of excess return, in some cases uncorrelated to other types of portfolio risk. In what follows, we consider five candidate themes: infrastructure, digital finance, sustainability, artificial intelligence and demographics.
Infrastructure encompasses an array of long-term, often publicly supported, investment projects. Those can include transportation, communication, power generation and transmission, among others.
Globally, investment in infrastructure is driven by demographics (e.g., growing populations in frontier and emerging economies), technological advance, national or regional security needs (e.g., European energy), or climate change. In some countries, notably the United States, past underinvestment in maintenance or development of roads, bridges, highways, ports and airports is a further driving factor behind larger investments in infrastructure.
Because much infrastructure serves a public need (roads, communications, power transmission), actual spending requires political will. Elections can therefore have a significant impact on investor perceptions of capital spending, and hence on investment opportunities. But in some cases, such as rebuilding the U.S. electricity grid, creating a more secure and robust European energy sector, or addressing challenges posed by climate change (responding to devastating storms, taking steps to remediate against potential future damage), momentum is well underway and is unlikely to slow or reverse even as political pendulums swing.
Much infrastructure spending is “bricks and mortar,” as spending boosts revenues and earnings of sectors such as basic materials (e.g., copper for the grid, steel and cement for roads and bridges) or industrials (capital equipment). But tech companies would also benefit from increasing infrastructure expenditures. Smart roads, smart grids, rural internet, or improved cellular capacity are but a few examples of businesses likely to see higher revenues as infrastructure projects proceed.
Digital finance is easily misunderstood. It is not a synonym for crypto currencies. Rather, digital finance represents the transformation of how assets – including securities – are originated, distributed, and held. Powerful incentives to reduce costs and ensure security underpin these assets.
Traditionally, the financials sector has offered fractional ownership of assets or liabilities for a small percentage of the global economy’s wealth. Even the trillions of dollars of public equities, government and corporate bonds represent only a slice of the accumulated wealth individuals hold. Vast areas of real estate, personal finance, or future cash flows remain to be securitized, a process that digital finance could – and one day probably will – facilitate.
Digital finance also offers platforms, including blockchain, to improve the safekeeping of assets financial institutions hold for savers and investors. Digital finance promises more secure and lower-cost ways of trading and warehousing financial assets. Central banks are also considering digital finance platforms for the payments system.
Initially, digital finance investment opportunities are likely to arise in the technology sector. But the leverage they will create in efficiency and growth for financial services suggests that their innovation and adoption will also spur higher sustainable profitability in banking, investment banking, asset management and insurance.
Sustainability is often thought of as a subset of ESG investing (Environmental, Social, Governance criteria for investment decision-making).
That definition is too narrow.
It is abundantly clear, for example, that climate change is forcing industries and businesses across an array of sectors to anticipate challenges and discover opportunities. Climate change is not merely an ESG criterion, it is a present and future challenge as well as a potential opportunity.
According to research some of the largest reinsurance companies in the world have undertaken, the annual costs of climate change could reach double-digit levels of gross domestic product by the middle of this century. In some sectors, such as property and casualty insurance, collateralized lending, agriculture or pharmaceuticals, climate change may pose the single highest business risk, exceeding those otherwise associated with those lines of business.
As a theme, therefore, sustainability is about investments – some of which overlap with infrastructure – addressing the economic and financial risks associated with climate change. It also is about how astute investors can spot opportunities as industries, governments, and non-profits increase spending on remediation and prevention.
Sustainability, however, is not merely about climate change. It also addresses the need to ensure adequate supplies of fresh water, to reduce harmful pollutants related to our use of plastics, or to ensure adequate pollination of our food supplies.
Sustainability is also about how firms address social change. Customers and investors in many sectors are increasingly seeking out firms who meet their expectations for quality, financial strength, and social responsibility.
Politics may hasten or slow aspects of sustainability. But at some point, investors will need much more information about how companies in which they invest are managing risks and opportunities in areas such as carbon emissions, climate change preparedness, or the diversity of their workforce. That will require entirely new ways of measuring and reporting data about company activities, because those metrics may have a direct impact on the profitability of companies, and the valuations investors are willing to pay for them. Therefore, among the likely “winners” in the sustainability category are data providers and data analytic firms that can provide clear and objective metrics on sustainability as a financial consideration.
Artificial intelligence, or AI, has already captured the attention of investors. AI accounts for much of the growth and market leadership of the Magnificent Seven, for example.
But AI is not without its skeptics. Many academic economists, for example, have warned about excessive hype and exaggeration of AI’s current benefits and even its future potential. A recipient of this year’s Nobel Prize in Economics, Daron Acemoglu, is one of them.
AI skepticism goes beyond the observation that many AI firms trade on demanding valuations, implying that it may be very difficult for them to deliver profits as high as those their market multiples imply. It also stems from a “we have seen this before” observation.
Heralded past inventions, many of which utterly transformed our lives, from 16th century navigation to 19th century railroads, 20th century automobiles, land development, computing, or the internet, have often treated investors rudely via bubbles, manias, bankruptcies, and even fraud. In many of those cases, the underlying technologies, and the ways they transformed the way we do things, the way we live, and the way we get around, were genuinely revolutionary and welfare-enhancing. Investor returns, however, were not always golden.
At least one of our five themes ought to be a cautionary one. AI has been the “new-new” thing for the past decade. It has already spawned great companies and great wealth. But extrapolation, particularly from extreme levels of enthusiasm, can be a dangerous thing.
The answer, therefore, is not to belatedly jump on the existing AI bandwagon. Rather, investors would be well advised to consider an active approach to discovering the companies most likely to transform business models while applying artificial intelligence. In our view, AI – if it is truly revolutionary – will reward investors beyond those who invested in computer chips. The next stage of returns likely resides in those industries that intelligently apply AI to their production, product development, and client experience.
No list of 21st century social, economic, or investment themes could be complete without reference to demographics. In Europe, North America and Japan, populations are aging. The same is true in China and across other parts of East Asia (e.g., Korea). On the other hand, populations in much of South Asia, Africa, the Middle East, or Latin America, are much younger.
In a world where borders were opening to trade and investment, and where moderate levels of migration were possible, international differences in demographics offered opportunity for globalization to exploit factors of production as a win-win proposition. That era is over for the foreseeable future.
As a result, demographics is becoming a national issue. Worker shortages in Japan, for example, must be addressed via new technologies, with only modest relief from inward migration. This may also be true for Europe or the United States, given immigration fatigue expressed in modern populism.
Nor is demographics merely about taking care of the aged and infirm, as stupendous that challenge may become. Planting and harvesting crops, once a primary source of employment for immigrants to the United States (documented or not), may require transformative new technologies to deliver, for example, fruits, vegetables, and nuts from California’s Central Valley to grocery stores across the United States as cheaply as can be offered today with immigrant labor.
Financial services are also at the forefront of demographic challenges. Aging populations require better financial advisory services, alternatives to traditional investments, insurance policies, and annuities to boost financial resources to those approaching the end of their working lives, or already in retirement. Governments will have to consider changes to tax codes and savings incentives to help ensure sufficient financial assets for growing numbers of non-workers in the West and China.
Our outlook for 2025 spans traditional public market prospects, those for alternatives, as well as an assessment of key themes likely to drive long-term returns in various sectors.
Our overarching theme is preparedness. Many investors who have benefited from superior returns in the past two years should not complacently expect more of the same. In our view, it is time to prepare for a more realistic world of more moderate returns punctuated by occasional setbacks. Fortunately, alternatives and thematic ideas can complement traditional portfolios of stocks and bonds, adding return and mitigating risk.
In looking ahead to 2025, we believe investors should reinforce a portfolio-centric approach to managing their wealth and assets. It is vital to identify both probable sources of return, and candidates of risk. Balancing return and risk by correlation, volatility, and liquidity preference is increasingly important. In 2025, we believe the effective management of wealth is less likely to be driven by spectacular returns on a subset of assets, and more likely to reflect sound portfolio decisions.
Stephen Dover, CFA, is Franklin Templeton’s Chief Market Strategist and Head of the Franklin Templeton Investment Institute. Originally published on the Franklin Templeton Institute website. Follow Stephen Dover on LinkedIn where he posts his thoughts and comments as well as his Global Market Perspectives newsletter.
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What are the risks? All investments involve risks, including the possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Investing in the natural resources sector involves special risks, including increased susceptibility to adverse economic and regulatory developments affecting the sector. Special risks are associated with investing in foreign securities, including risks associated with political and economic developments, trading practices, availability of information, limited markets and currency exchange rate fluctuations and policies. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in emerging markets, of which frontier markets are a subset, involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Because these frameworks are typically even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with emerging markets are magnified in frontier markets. To the extent a strategy focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a strategy that invests in a wider variety of countries, regions, industries, sectors or investments.
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