It’s natural to wonder whether 2025 will bring opportunities or challenges in investing. While no one can predict the future, we can examine key trends to guide smart investment choices.
Will Hobbs, our Head of Multi-Asset Wealth, explores some of the risks and opportunities investors could face in 2025.
He said: “With no real way of knowing what the future will bring, investors as ever must expect the unexpected, and arm themselves with a diversified investment portfolio which aims to weather any kind of economic environment. We can, however, look at some of the things to expect in 2025.”
Technology stocks: Are the “Magnificent Seven” losing their shine?
US technology giants have driven much of the US and global stock markets impressive run this last decade or so. But these stocks are now richly valued, while their collective dominance is conceivably challenged by stricter regulations and new technologies. There is sense in maintaining exposure to other parts of the world, even if this incredible stretch of American dominance continues.
Certain European and Asian shares, for example, could be a cheaper route to accessing growth in the US, since a proportion of business by European companies comes from North America.
What this means for you: If you’ve invested in US or global tech funds, consider whether the high valuations still make sense for your goals and look into how diversified your portfolio really is. Without knowing it, a significant proportion of your portfolio could be invested in the “Magnificent Seven”.
If you’re on the lookout for emerging sectors, like artificial intelligence (AI), remember that smaller, innovative companies can outperform larger, more established ones but they can also be more volatile. In a world where investors are trying to find the highest possible returns for the lowest possible risk, you might want to question whether extra risk fits your goals.
The bond market: Why it matters for investors
The surges in government borrowing these last few years go hand in hand with fears of future stagnation. We’ve allegedly borrowed from our future, now we must pay the price as such. However, a firm connection between government debt, the interest rate they have to pay and ensuing economic growth is more elusive than widely assumed. Growth is driven by factors well beyond just borrowing, meanwhile government interest rates do not just derive from the amount a particular state has borrowed relative to their output.
Even so, we are likely seeing a shift. For many of the years running up to the pandemic, low inflation meant low interest rates. Bond investors, who mostly worry about inflation above all else, appeared relaxed even as governments tapped them for ever more funds. However, inflation is now fresher in all of our memories, following the post pandemic price shock. Would be lenders to governments appear more sensitive as a result. The UK government’s mini-budget crisis of 2022 is a good example of this very different setting for government borrowing.
The threat ahead centres around a more sensitive bond market meeting a more disinhibited US administration offering a range of policies that could easily stoke price pressures and wider inflation.
What this means for you:
Fixed-income investments: Government bonds have long been used as insulation by investors. The relatively dependable capped returns on offer can be attractive, particularly alongside more volatile investments. The interest rates currently on offer at a range of maturities look more attractive than they have for some time.
Inflation risk: Keep an eye on inflation. Bonds can lose out if inflation rises more than investors had expected, wiping out expected returns.
Trade wars and tariffs: A global ripple effect
Changes in international trade policies, particularly in the US, could impact markets worldwide. For example, US tariffs on Chinese or European imports could disrupt global trade and affect exporters.
What this means for you: Investors with global portfolios should monitor trade developments, as they could influence company profits and stock market returns. Diversifying across regions and sectors can help manage this risk.
The US Dollar’s strength: How long will it last?
The US dollar has been a pillar of global strength for many decades, but this won’t last forever. Rising interest rates in the US have, in part, attracted investors to dollar-denominated assets, but any loss of confidence in the US government or economy could weaken the dollar.
What this means for you: A strong dollar benefits investors holding unhedged exposure to US assets. However, we would preach diversification again. There are paths ahead where the US assets and the dollar fare less well and international diversification is better rewarded than in the past few years.
The bigger picture: Freedom vs. stability
The US economy’s strength is underpinned by innovation and dynamism. Individual freedoms are often thought to be central to both. But balancing those freedoms with a varying need for civilised stability is a challenge always and everywhere. How societies address these tensions could shape the future of growth and investment opportunities.
What this means for you: Long term investment returns are driven by productivity growth around the world. New technology and how societies adopt and adapt it, are everything here. We need to be humble as to where these investment opportunities will be hottest in the years ahead. Simply assuming recent winners will inevitably continue winning has often proved a mistake. Some of the most interesting opportunities to profit from technological change lie in emerging markets such as India for example.
Final thoughts: Stay positive, stay diversified
While the current economic climate can seem messy, productivity is improving in the US and may spread to other markets. For investors, the key is to remain patient, diversify your portfolio, and (as always) avoid betting too heavily on one trend, country or asset class.
Key takeaways for 2025
- Bonds are offering juicier returns, but watch for inflation risks.
- Diversify globally to protect against trade disruptions and currency fluctuations.
- Evaluate whether expensive tech stocks still fit your goals.
- Consider long-term trends in healthcare and AI.
Investing in 2025 is not going to be plain sailing and will require investors to be adaptable and informed. By focusing on good diversification and your long-term goals, investors can navigate whatever comes next.
