Market outlook for 2025

Allan Eriksén, Strategist and Portfolio Manager, UB Asset Management

 

The outlook for equity and bond markets in 2025 still appears predominantly positive.

Allan Eriksén, Strategist and Portfolio Manager, UB Asset Management

 

When the market developments for 2024 were predicted at the start of last year, the expected normalization of inflation and the subsequent interest rate cutting cycle were at the forefront. Inflation and interest rate forecasts largely came to fruition, although the rate cuts were delayed until the latter part of the year. The outlook for equity and bond markets in 2025 still appears predominantly positive.

 

This year, the focus is on the assumed policies of the new U.S. president, Donald Trump, or rather the unpredictability surrounding them. To sum up Trump's election promises, taxes will be cut, regulation will be eased, immigration policy will be tightened, and tariffs will be increased. The first two factors are expected to support economic and earnings growth, while the latter two are seen as inflationary or growth-reducing.

 

The market interprets the situation as one where the growth-positive factors are largely expected to be implemented, while inflationary actions are likely to remain limited. As a result, after Trump’s election victory, the U.S. economic and earnings growth forecasts have been revised upwards. However, inflation expectations have remained relatively moderate. Already well-developed equity markets rose considerably in the latter part of the year, fuelled by Trump’s victory.

 

Since the U.S. presidential election, bond market developments have been clearly upward. Additional rate cuts by the central bank are now only expected to be very modest, if they occur at all. Given the uncertainty surrounding tariff and immigration policies, it is understandable that the central bank may want to slow down with further rate cuts. Once political uncertainty subsides, we believe that rate cuts will continue.

 

Assuming that threatening with tariffs remains mainly a negotiation tactic and that immigration policies are not drastically restricted, we believe the positive trend in both equity and bond markets will continue in the U.S. in 2025.

 

European Market Outlook Remains Positive Despite Modest Economic Growth

 

The situation in Europe is different. On the national level, southern European economies are performing relatively well, but particularly large Central European countries like Germany and France are struggling with challenges. In simple terms, Europe's problems can be attributed to its economic growth dependency on China, energy dependency on Russia, and defence dependency on the U.S. However, the rate cuts initiated by the European Central Bank in the summer of 2024 are supporting economic growth.

 

There is hope in Germany, where the upcoming federal elections in February are expected to bring the conservative CDU party to power. The party has announced its intention to remove the country's public debt ceiling, which would create conditions for a strong stimulus policy, as Germany's public debt relative to GDP is among the lowest in Europe. For the law change to be possible, however, the extreme right- and left-wing parties must not hold more than a third of the seats in the Bundestag. Germany's likely stimulus is expected to act as a catalyst for economic activity in the rest of Europe.

 

We also believe European equity markets will develop positively in 2025. The attractiveness of European equity markets is enhanced by low valuation levels, particularly relative to the U.S. Using profit growth forecasts, broad European indices are 30-40% cheaper than their U.S. counterparts. Even considering the impact of large tech companies, the discounts remain historically significant.

 

Bond markets in Europe also look promising. Inflation is expected to fall faster than in the U.S., providing the European Central Bank with better conditions to continue cutting interest rates.

 

China’s Economic Stimulus Would Support Global Growth

 

After the real estate market crisis that began in 2021, China has been hesitant to stimulate the economy as generously as it has in previous crises. As a result, the country's economic growth and outlook have weakened considerably. However, in 2024, China did increase its stimulus efforts again. The scale and targets of these efforts have yet to convince the market.

 

With domestic demand in China remaining weak, the country’s industry has increasingly focused on exports. A prime example is the electric vehicle industry, where shockingly low prices have prompted even the free-trade-oriented EU to shield itself with new tariffs.

 

Without significant additional stimulus, China’s economic development is unlikely to improve in 2025. This would weaken exports to China from the rest of the world and increase Chinese imports, particularly in Europe, especially if high tariffs are enacted in the U.S. on Chinese products.

 

However, if China eventually embarks on a strong stimulus program, the country’s depressed stock market could surprise positively. A more favourable economic development in China would also support global economic growth.

 

Geopolitical Risks Remain a Key Theme

 

One of the key variables in last year’s forecasts was geopolitics, and this will also be the case in 2025. A ceasefire or truce is expected in Ukraine this year. Trump has "promised" to end the war immediately upon taking office. Ukraine is likely to agree as long as the peace terms are reasonable. The problem is likely with Putin, for whom ending the war without a clear victory or perhaps ending it at all would pose an internal political issue.

 

We do not believe the war in Ukraine will significantly disrupt global markets this year. A potential lasting peace and subsequent reconstruction would certainly provide a considerable boost to (Eastern) Europe.

 

Other key geopolitical issues remain in the Middle East (Iran) and China. We do not expect escalation in these regions either.

 

Iran is suffering from economic sanctions and internal political instability and has shown its inability or unwillingness to strike effectively at Israel. Many expect Iran to seek a new nuclear deal with Trump’s administration to lift sanctions.

 

In China, economic concerns are believed to delay any possible aggression toward Taiwan.

 

 


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The information presented is based on UB’s own estimates and sources considered reliable by UB. The information on which the conclusions are based may change quickly and UB Group may revise its market view without prior notice. No information obtained through this presentation should be construed as a solicitation to invest. When making investment decisions, readers should base their decisions on their own assessment of the investment and the risks involved, and to consider their personal goals and financial situation.

 

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