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All along 2024, a few economic and societal narratives dominated markets. Key narratives evolved around:
Let’s look at some of them in detail.
Economic growth
Looking ahead, the effects of economic and societal narratives are expected to echo through the global economy to varying degrees over the next few years with a contextual world being more polarized than ever.
Most of the world’s key regions will continue to experience growth below historic averages. There is probably one exception in the basket, i.e. the U.S. economy is likely to grow beyond 3 % in 2025 and 2026. Historically, the U.S. economy has grown at an average annual rate of around 2% to 2.5 % in real GDP terms. Next year’s top-range growth estimated is due to transformative technologies and favorable policy shifts. In Europe, the projected expansion is around 1% only, the old continent will continue to suffer from a rise in unemployment, political, economic, and trade disruptions, while China’s underperformance, due to its overinvestment in the manufacturing sector and insufficient internal consumption and stimulus, restrains growth across all emerging markets.
For the time being, global industries appear to have reached a balance. Their favored playground is an environment with moderate growth, disinflation, and continued monetary easing. All bodes well for markets, complemented by the potential for greater deregulation under the new Trump Administration 2.0.
The complex economic, political, and societal setup for the next few quarters favors fixed-income opportunities that benefit best in modest growth and lower inflation environment. We expect that political and economic clarity will make equities more attractive towards the end of 2025 with a meaningful pickup in mergers and acquisitions, deals that have evaporated while capital costs were well above average historic costs.
We do not understate the concerns that new trade policies and tighter labor and migration rules may impact negatively growth everywhere. However, the impact of new trade policies and restrictions on migration will depend on their implementation, timing, and sequencing. As experienced in the past, such changes are well communicated, but oftentimes loopholes allow alternative opportunities to perform, hence a negative macroeconomic impact is largely diffused.
In the last three years, policymakers and investors’ main concern was the rate of inflation. As of now, inflation is expected to continue to normalize, however, regional pockets of higher inflation for products and some services will continue to exist. One can expect that, given the new trade tariffs and China’s tit-for-tat cycle, inflation may rebound temporarily by the end of 2025. This phenomenon will be less of an issue in the euro area and the UK, where inflation should recede steadily amid underlying growth risks. With this backdrop in mind, the FED may exercise one last cut in the 2nd semester of 2025, while the ECB and BOE are expected to continue cutting at regular intervals.
Labor market shifts and migration development around the globe will matter more for investors in the coming years than in the past.
2024 was an election year and almost everywhere, general elections have marked a significant shift towards Republican and right-wing parties that normally endorse stricter labor market and migration rules. Popular voices advocate that immigration is to blame for the unwell-being and disadvantaged treatment of native populations. Interestingly, this is not the cause but the upshot of social policies implemented in the past. When looking at past election outcomes, one can observe the following: In multiple countries, democrats and socialists lost the popular vote because they addressed specific issues of some communities intending to overturn their opinion. However, this granular and community-based treatment generated the opposite effect, the groups in question felt stigmatized and ensnared. Oftentimes, winning parties address global and nationwide concerns, be it economic or societal, irrespective of the longer-term negative consequences.
Labor markets and migration flows respond to economic trends and short- and long-term development. A political framework may avoid excesses and abuses, but it may not change the course of a well-entrenched offer and demand system. Regions with well-advanced economies and where products and services of high-value add are manufactured depend on efficient labor market conditions and migration is the adjusting factor.
President-elect Donald Trump's potential policy reforms in the field of migration is a global concern to the economy but we doubt that the magnitude, timing, and sequencing will decrease global growth at this point in time.
With the election of Donald Trump on November 05, the South Korean president implementing martial law, and the French lawmakers voting to topple the government under Prime Minister Barnier, the financial and geopolitical world changed once more. The ripple effects are wider than trade – it is set to change the shape of the world’s major economies and political frameworks as highly democratic systems have shown their limits.
Markets respond positively to clarity and scenarios ranging from slower-than-expected deregulation, higher interest, and shallower tax cuts, among others. They are interpreted and the possible opportunities are extracted for investment cases. With each investment decision-making process, there is a bifurcation between potential sector beneficiaries and laggards. Here are our favorite sectors to start 2025.
After a few years of lackluster performance, the energy sector may collect some handsome dividends. The Trump Administration is known for its support of traditional energy. Deregulation could boost the industry, yet the outlook for pure big oil players remains somewhat uncertain due to potential oversupply and weakening global demand, particularly from China. Conversely, natural gas could see a more positive trajectory, driven by strong demand from Europe and increased domestic usage for electrification and data centers, in part to power AI technologies. The clean energy industry, meanwhile, might experience challenges, as Trump has indicated a rollback of tax credits from President Biden’s Inflation Reduction Act of 2022, although a complete repeal seems unlikely given the related investment has benefited Republican states and districts.
In Developed Market Countries (DM), defense spending is expected to remain strong amid rising geopolitical tensions. Especially European countries have multi-year catch-up investments to perform. On the back of this, European defense stocks have outperformed their U.S. counterparts. Furthermore, uncertainties about future U.S. involvement in the North Atlantic Treaty Organization (NATO) and increased defense spending requirements by other NATO members in response to the Russia-Ukraine conflict may require additional budget allocations for decades to come. Technological advancements are also creating a split within the defense sector, with increased investments in cybersecurity, AI, drones and other advanced technologies potentially benefiting smaller, specialized companies over traditional defense giants.
The technology sector could see a bag of mixed fortunes. Cryptocurrencies and AI-related industries are likely to benefit from a favorable stance by the Trump Administration. In addition, long-term investments in reshoring semiconductors through the CHIPS and Science Act of 2022, which the Trump Administration 2.0 is expected to expand, could signal that AI policy has become a national security priority among lawmakers on both sides of the aisle. Favorable trends are also evolving in the field of Datawarehousing, which interconnects with AI and catapults the subsector onto a lasting secular growth trend. On the other hand, social media and information-related companies might continue facing regulatory issues, antitrust challenges, and anti-competition concerns leading to potential spin-offs and break-ups.
Knowledge is power.
