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It’s time for our 2025 investment outlook, the product of much thought and analysis by some of the key investment professionals and thought leaders at Invesco. This is always a very collaborative effort, with a healthy amount of disagreement and discourse. At Invesco, we value diversity of views, and believe it ultimately strengthens our outcomes.
After a steep climb to restrictive rates to curtail rapidly rising prices, most central banks all but declared victory over inflation in 2024. Yet many of the world’s major economies have been showing signs of slowing, with pockets of weakness, such as slipping Eurozone Purchasing Managers’ Indexes, rising unemployment rates, and faltering consumer confidence pushing central banks to cut interest rates in the latter half of the year.
Looking into 2025, the key question remains whether central banks can steer the world’s major economies toward moderate growth while keeping inflation in check. New and old challenges, including geopolitical tensions and a new administration in the U.S., introduce uncertainties in the path ahead. We expect significant monetary policy easing to push global growth back to potential rates in 2025, fostering an attractive environment for risk assets as central banks achieve a “soft landing” of lowering inflation without a recession.
Since mid-2024, views about the trajectory of U.S. economic growth have been rotating between pessimism and optimism in fits and starts. Despite patches of weakness, we’ve continued to see resilient growth in the U.S.
Going into 2025, we expect the U.S. economy will continue to grow near its potential rate. While leading indicators offer a mixed picture, we suspect that areas of weakness, especially from the manufacturing sector, offer limited insight due to post-pandemic swings in demand between goods and services. We believe a modest slowdown in growth to potential rates will continue in the U.S. in the near term, given the restrictive monetary policy environment that has persisted for several quarters and continues to this day, despite recent policy changes. However, we believe the resilient labor market and strong overall household balance sheets should help spending and the broader economy continue to grow, and that continued easing in financial conditions and continued real wage growth should help the U.S. economy re-accelerate in 2025.
We believe the Federal Reserve (Fed) will lower its policy rate toward neutral in 2025, reducing the downward pressure of higher interest rates on growth. If growth shows signs of deceleration, the Fed has additional room for further policy easing, laying a positive backdrop for economic momentum through 2025.
We continue to expect the U.S. to deliver higher growth than other developed economies, largely due to the combination of its favorable demographics and immigration, its business dynamism, and its healthy rate of productivity growth.
The Canadian economy has also faced headwinds and has not fared as well as the U.S. economy. However, now that the Bank of Canada has begun easing, it appears the Canadian economy is likely to follow in the footsteps of other major developed economies and re-accelerate next year. We expect the economy to be helped by improving real wages, with a further boost if an accelerating global economy leads to higher commodity prices.
After years of slow growth, the U.K. economy has shown surprising resilience in recent quarters, and we are cautiously optimistic. The U.K. has faced some of the same setbacks as the eurozone – the energy price shock unleashed by the Russia-Ukraine war still weighs on spending – along with the idiosyncratic challenge of Brexit. Other factors have been weak investment and productivity growth since the Global Financial Crisis, worsened by Brexit-related trade/investment barriers with the European Union (EU) and an increase in economic inactivity since Covid (in contrast to the U.S.). A lack of investment in the fabric of the economy (infrastructure, health care, and education) may have damaged performance, but the U.K. is not alone in this.
However, the U.K. could still surprise to the upside. The recently elected Labour government’s Autumn Budget has the potential to boost growth, as forecast by the Bank of England (although it expects a bump in inflation as well). Post-Brexit trading relations with the EU may also improve, which could facilitate the speed of trade and regulatory constraints on both goods and services.
We expect the U.K. to continue to deliver decent growth as inflation continues to trend lower (and real wages rise). However, challenges remain: The U.K.’s fiscal overhang remains a hurdle, and its relatively more stubborn inflation outlook suggests the Bank of England will need to keep rates relatively high. Nevertheless, rate cuts should help the UK consumer and help lift housing market activity.
With inflation and wage growth seeing a revival in Japan, the country appears to have broken out of its long-running low-inflation regime. In contrast with many central banks, the Bank of Japan moved into a tightening stance in 2024 as inflation accelerated. However, its recent policy tightening has meant significant currency volatility, complicating Japanese export-focused business. Yet Japanese equity valuations have remained attractive relative to some markets such as the U.S.
We suspect Japan will reaccelerate in 2025 as wage growth helps push up consumption. As the Bank of Japan continues its very modest tightening cycle and other central banks ease, we suspect the yen may strengthen.
Markets appear to have priced in a relatively optimistic macro scenario already. Given the positive macro backdrop, we favor an overweight to risky assets but are cognizant of high valuations for some assets.
Equities. We favor cyclicals and smaller caps given lower valuations and greater sensitivity to the economic cycle. We also prefer developed ex-U.S. stocks – especially U.K. and domestic-focused Japanese companies – and emerging markets equities for those same reasons.
Bonds. With bond yields sitting at relatively high levels, we believe bonds also offer attractive opportunities despite tight spreads, especially for longer holdings periods. Strong fundamentals underpin many fixed-income assets, helping to explain extremely tight credit spreads in both investment grade and high yield credit.
Alternatives. We are also finding more opportunities in real estate, where we believe there is meaningful upside potential as the environment improves and rates ease. In terms of commodities, we favor industrial metals given their sensitivity to the economic cycle. In terms of currencies, we anticipate the U.S. dollar will begin to weaken in 2025 against some currencies as the Fed continues to cut rates, and we would favor currencies such as the Japanese yen and the British pound.
This article is excerpted from Invesco’s 2025 Investment Outlook. To view the complete outlook, including more detail on the Eurozone, China, and Emerging Markets, visit Invesco’s 2025 Annual Investment Outlook.
Kristina Hooper is Chief Global Market Strategist at Invesco. This article first appeared in the Invesco Insights – Markets and Economy page.
Disclaimer
© 2024 by Invesco Canada. Reprinted with permission.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
The opinions referenced above are those of the author as of Nov. 15, 2024. These comments should not be construed as recommendations, but as an illustration of broader themes. This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
Forward-looking statements are not guarantees of future results. They involve risks, uncertainties, and assumptions; there can be no assurance that actual results will not differ materially from expectations. Diversification does not guarantee a profit or eliminate the risk of loss. All investing involves risk, including the risk of loss.
Diversification does not guarantee a profit or eliminate the risk of loss.
All figures are in U.S. dollars.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
All investing involves risk, including the risk of loss.
Past performance is not a guarantee of future results.
In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.
Commissions, trailing commissions, management fees and expenses may all be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Please read the simplified prospectus before investing. Copies are available from your advisor or from Invesco Canada Ltd.
Investment funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that any fund or security will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.
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