For a deeper dive into these topics, read Fixed-Income Outlook 2025: Fertile Ground, and Equity Outlook: Preparing for Profound Policy-Driven Change.
Transcript
Chris Hogbin: So, it feels as if we’re at a period of pretty acute geopolitical tensions. In 2024, we had 72 elections around the world, including the US election with an incoming Trump administration. So, Scott, what’s your outlook for the macroeconomy?
Scott DiMaggio: We think this is an environment of slower growth, and it will be an environment where central banks will be able to cut interest rates.
I would also say one thing we should have some confidence in is this notion of US exceptionalism. Many of the proposed policies would suck growth back into the US and that will be very harmful for developed-market economies, probably enabling developed-market central banks outside the US to be more aggressive on monetary policy than the market is expecting.
CH: And Nelson, on the equity side, it seems as if the initial reaction of the market to Trump’s reelection was really quite positive.
Nelson Yu: Markets moved so much at the end of 2024, off the back of suspicions of what might happen. If you just think about two of the most common policies: one around taxes and one around tariffs.
For tax cuts, the companies that can really benefit along a long-term basis are the ones that can reinvest that windfall in a very disciplined manner. If you think about tariffs, there are US companies that actually have a long supply chain outside of the US. They actually might get hurt. There’s companies outside of the US who have invested in manufacturing plants within the US, and that could be a competitive advantage.
So, I think you really have to dig down, do the active research and think company by company through this.
SD: If we get a lot of tariffs, right, which is a big if, that should lead to lower US imports, it should lead to a stronger dollar and potentially a higher tax on consumers. So tariffs could be inflationary, at least in the short term. Countries that are running big trade surpluses with the US—places like Mexico, right—they may be more impacted than places like Indonesia that have a lower exposure to what could happen in the US.
So, security selection, country selection, continues to be critically important. If the deficit, which is running 6.5% of GDP today, goes up in a more meaningful way, right, that could be bad for bond yields. So, I think we do want to pay attention to, as Nelson said, what are the policies, when they get enacted and, especially, what are the costs?
CH: So, Nelson, as you think about the setup for equities in 2025, they enjoyed a very strong 2024—valuations are pretty elevated, particularly in the US.
NY: That top 10 set of companies is so narrow, and narrowly focused into just technology. If you look outside of those companies, we’ve got lots of opportunities across US industrials, US materials, financials. Those all trade at relatively lower levels of valuation. Outside of the US—Europe, Asia, those valuations actually are at historically normal levels and even below normal levels.
So, I think there’s a lot of opportunities of what we can find. And then also, into small-caps. We can see that while small-caps are trading at the lowest valuations in nearly a decade, there’s a lot of good growth opportunities in those companies.
CH: And Scott, as a complement, where do you see the greatest opportunities in 2025 for fixed-income investors?
SD: So, central banks will continue to cut rates, we know there’s roughly $7 trillion in cash sitting on the sidelines in the US. And I think any backup in yields, any backup in spreads is going to present a buying opportunity. So, for us, credit remains attractive. For us, we think clients want to maintain duration in their portfolios. We have certainty there’ll be many hiccups in 2025 and we think that duration protection will be something that will benefit asset allocators.
CH: Clearly a lot of risk out there, but also a lot of opportunity within equities, within fixed income. But a clear need to remain active here to navigate the uncertainties as we progress through 2025.
