December 13, 2024
2025 outlook—resist turning up the volume
2024 was a great year for markets. Will that winning streak continue? Our market strategists share their market outlook for the year ahead.
Asset allocation views: balancing U.S. equities and trade risks
As we head into 2025, U.S. trade policies take center stage amid the economy’s stronger fundamentals compared to peers.
Key global themes
Heading into a dynamic environment: while most central banks globally will continue to ease rates, evolving U.S. policies could bring new complexities.
2025 may begin strong, but brace for possible turbulence
- Growth, while positive, will be below trend across most major economies in 2025, driven by pressured consumers and high borrowing costs. Financial conditions are expected to remain balanced, avoiding extremes that could either slow down the economy or reignite inflation.
- We expect key central banks to continue easing monetary policy. However, dynamics will vary: Europe and Canada are likely to ease due to weak growth; the United Kingdom also faces weak growth, along with high inflation, while the United States may have a slower easing cycle amid healthy growth and policy uncertainty, affecting dollar-dependent emerging markets. Japan and Brazil are outliers and are expected to continue tightening monetary policy.
- These conditions are expected to be favorable for risk assets like equities as we enter 2025 but be prepared for turbulence as government policy uncertainty could lead to volatility.
The United States remains the favored investment choice
- U.S. equities will continue to lead, driven by favorable monetary policy, a still fulsome labor market, and stable inflation within a resilient economy. Policy uncertainty, particularly around trade, could also trigger a flight to safety. While valuations are high, we believe they are to some extent supported by comparatively robust earnings growth and promising prospects for U.S. investments.
- Additionally, U.S. markets may benefit from pro-growth economic policies, such as corporate tax cuts and deregulation. While broad-based tariffs pose a potential risk, we expect a more targeted and strategic approach to trade negotiations.
- Further, continued positive economic growth and broader earnings strength could create more diverse market opportunities beyond the handful of equities that led the U.S. markets in 2023 and 2024. Undervalued areas such as cyclical sectors and small-cap stocks are potentially attractive investment options.
Position portfolios for the potential of a steepening yield curve
- The U.S. Federal Reserve (Fed) is expected to further cut rates in 2025 to stimulate growth as near-term inflation concerns decrease. This will likely lower short-term interest rates while deficit spending and inflation expectations could raise longer-term rates.
- We anticipate increased fiscal spending, additional tax cuts, and deregulation under the new administration, similar to the period following the 2016 presidential election. This could lead to higher growth and inflation expectations, resulting in elevated long-term yields.
- In this environment, potential investment opportunities include financial stocks, shorter duration bonds, and strategic allocations to inflation-sensitive assets such as commodities, real estate investment trusts (REITs), and private real assets.
Source: Manulife Investment Management, January 2025. These views are updated on a quarterly basis. This commentary is provided for informational purposes only and is not an endorsement of any security, mutual fund, sector, or index. No forecasts are guaranteed.
Active asset allocation views
Asset class overview
Asset class overview
- For 2025, we favor equities over fixed income due to a resilient economic backdrop, strong earnings growth, and potential pro-growth economic policies. With the election behind us, we anticipate a more stable environment that promotes market growth and boosts investor confidence; however, policy uncertainty remains a key risk. Longer term, we see opportunity within fixed income, particularly on a risk-adjusted basis.
- We have a strong preference for U.S. equities, as we believe the U.S. market will continue to outperform with leadership across various market capitalizations. We remain vigilant in seeking global diversification opportunities and are prepared to reduce exposure when potential risks arise.
Broad equity
Broad equity
- We remain overweight in U.S. equities, supported by accommodative monetary policy amid a moderating labor market and stable inflation. Despite high valuations, U.S. equities continue to gain support from strong earnings growth compared to other developed markets.
- Our outlook on Canadian equities remains neutral, given the risks surrounding trade policy with the United States and the potential for tariffs. However, improving earnings growth and favorable valuations compared to other developed markets make Canada attractive. The Bank of Canada’s cautious approach to rate cuts amid declining inflation could be beneficial.
- Our stance on developed international equities outside North America has shifted from neutral to underweight. Despite the valuation discount compared to the United States, muted forward earnings growth, lower economic productivity, tighter fiscal policies, and political instability pose near-term risks.
Regional/sector-specific equity
Regional/sector-specific equity
- The economic recovery in Europe is slowing as core countries are still facing challenges such as domestic political instability, fiscal concerns, and a weak economic boost from China. Additionally, new threats of U.S. tariffs are creating uncertainty and affecting the outlook for risk assets. Despite the presence of healthy shareholder yields and attractive valuations, it’s difficult to identify positive catalysts in the near term.
- We see Japan as a preferred market, but we have a neutral stance due to currency fluctuations. Uncertainty surrounding U.S. monetary policy and potential normalization by the Bank of Japan is affecting the USD/JPY exchange rate and Japanese equities; however, positive corporate governance reforms bolster our long-term positive outlook and the potential for improved valuations.
- We’re neutral on Asia equities overall but see opportunities in ASEAN markets that are more domestically focused. For Chinese equities, growth in policy-supported sectors and exports is offset by weaknesses in real estate and domestic consumption. Trade tensions and limited policy stimulus will pose challenges.
- We’ve adjusted our position on emerging Latin American equities from neutral to underweight due to a decline in economic activity and a less optimistic outlook for growth and earnings. Additionally, currency weakness is creating uncertainty around inflation expectations, particularly as Brazil embarks on an aggressive tightening cycle.
Fixed income
Fixed income
- We maintain a neutral stance on investment-grade bonds overall, but we prefer mortgage-backed securities due to several key factors: the high duration typically found in investment-grade credit, our inclination toward lower duration investments, the historically tight credit spreads in the investment-grade sector, and the limited prepayment risk currently present in the mortgage space.
- We believe leveraged loans provide a better risk/reward balance than U.S. high yield and should also benefit from limited rate sensitivity. Within high yield, there is potential for spreads to remain narrow for an extended period.
- Within Asia, we prefer high-yield debt over investment grade due to more attractive valuations with favorable spreads compared with historical averages. Default rates are likely to normalize after years of credit stress. Non-China high-yield debt presents resilient and solid fundamentals.
- We still maintain an overweight stance in emerging-market debt driven by strong fundamentals, limited default expectations, and favorable economic conditions increasing the likelihood of benefiting from high yields. That said, spreads have tightened and global trade uncertainties are a risk.
Private markets
Private markets
- We’ve upgraded our view on U.S. real estate to neutral, as the Fed has started its easing cycle; however, uncertainties around government policy and the potential for stickier-than-expected inflation could pose challenges.
- We’re optimistic about global infrastructure as strong trends like digitalization and decarbonization are driving high demand for data centers and renewable energy. This is further boosted by substantial government support, despite rising geopolitical risks and challenges in developing power supply infrastructure.
- Private credit continues to be attractive as banks remain selective amid tight lending conditions. This asset class is growing and broadening across sectors typically financed by public markets with smaller borrowers favoring its lower borrowing costs, flexible terms, and quick execution.
- We anticipate some near-term challenges in private agriculture due to high input costs, lower commodity prices, and geopolitical uncertainties. However, the long-term outlook is positive, driven by strong demand from population growth, favorable supply-and-demand dynamics, and improved trade relations.
Asset class focus
Enhancing portfolio resilience through real assets
Amid increased volatility in investment markets and lingering inflation concerns, investors can turn to real assets as an effective hedge within diversified portfolios.
Real asset investments, such as commodities, real estate, commodity-linked equities, and infrastructure, have historically offered protection against rising inflation. While global inflation has receded, easing monetary policy, potential tariffs, and geopolitical risks could apply upward pressure. Inflation trends have resembled those of the 1970s in the last decade, and these factors pose a risk of continuation. Markets may also be underpricing the term premium in fixed income, and historical equity fixed-income dynamics could potentially break down.
In such a scenario, investors may want to consider other assets in their portfolio as insurance.
In recent years, markets have been driven higher by a handful of technology-focused companies. This has led other sectors like energy, infrastructure, and REITs to be undervalued. While valuation is historically not a strong predictor of near-term performance, a strategic allocation to these sectors could allow investors to benefit from their favorable valuations.
In addition to their inflation-sensitive qualities, there are several other arguments in favor of real assets. The growing power generation needs to support artificial intelligence benefit energy, infrastructure, and metal and mining companies. Geopolitical risks and central bank buying also make gold and other commodities attractive. Meanwhile, the fundamentals in the real estate market remain strong, especially outside of the commercial sector. These factors can make real assets a compelling addition to a well-diversified portfolio.
U.S. Inflation in the 1970s vs. Today
Will the double-inflationary wave of the 1970s be repeated?
Asset class returns
Asset class returns comprise the Multi-Asset Solutions Team’s expectations of how different asset classes may perform over a 5- and 20-year-plus time horizon.
Expected returns
Source: Multi-Asset Solutions Team, Manulife Investment Management, as of October 31, 2024. Not all asset classes with forecasts are represented in every portfolio managed by the Multi-Asset Solutions Team. Data shown in the tables reflects the most recent data available. Asset class forecasts comprise inputs driven by proprietary Manulife Investment Management research and are not meant as predictions for any particular index, mutual fund, or investment vehicle. To initiate the investment process, the investment team formulates 5-year and 20-year-plus risk/return expectations, developed through a variety of quantitative modeling techniques and complemented with qualitative and fundamental insight. Assumptions are then adjusted for a number of factors. REITs refers to real estate investment trusts. USD, CAD, and CNY refer to the U.S. dollar, the Canadian dollar, and the Chinese yuan, respectively. This chart contains forecasts reflecting potential future events and is only as current as of the date indicated. There is no assurance that such events will occur, and the actual asset class return may be significantly different from that shown here. This material should not be viewed as a recommendation or a solicitation of an offer to buy or sell any investment products or to adopt any investment strategy. It is not possible to invest directly in an index. Past performance does not guarantee future results.
Multi-Asset Solutions Team
The global macro strategy team provides global economic forecasts and research for the firm and is housed within the Multi-Asset Solutions Team (MAST). The team’s analysis helps inform MAST’s positioning decisions as well as the investment views of other investment teams within Manulife Investment Management.
Nathan W. Thooft, CFA
Chief Investment Officer, Senior Portfolio Manager, Multi-Asset Solutions Team
Robert E. Sykes, CFA
Senior Portfolio Manager, Head of Asset Allocation, U.S., Multi-Asset Solutions Team
James Robertson, CIM
Senior Portfolio Manager, Head of Asset Allocation–Canada, Global Head of Tactical Asset Allocation, Multi-Asset Solutions Team
Luke Browne
Senior Portfolio Manager, Head of Asset Allocation, Asia, Multi-Asset Solutions Team
Geoffrey Kelley, CFA
Senior Portfolio Manager, Global Head of Strategic Asset Allocation and Systematic Equity, Multi-Asset Solutions Team
Benjamin W. Forssell, CFA
Client Portfolio Manager, Global Multi-Asset, Multi-Asset Solutions Team
Eric Menzer, CFA, CAIA, AIF
Senior Portfolio Manager, Global Head of OCIO and Fiduciary Solutions, Multi-Asset Solutions Team
Related viewpoints
December 10, 2024
Rolling returns: a better approach to evaluating investment performance?
Investment performance is often measured by calendar year returns. Learn how rolling return performance can offer a more accurate and insightful view.
Important disclosures
Equities
U.S. large cap is represented by the S&P 500 Index, which tracks the performance of 500 of the largest publicly traded companies in the United States. U.S. small cap is represented by the S&P Small Cap 600 Index, which tracks the performance of 600 small-cap companies in the United States. Canadian large cap is represented by the S&P/TSX 60 Index, tracks the performance of the large-cap segment of the Canadian equity market on the Toronto Stock Exchange (TSX). Non-U.S. developed is represented by the MSCI Europe, Australasia, and Far East (EAFE) Index, which tracks the performance of large- and mid-cap stocks of companies in those regions. Emerging markets is represented by the MSCI Emerging Markets (EM) Index, which tracks the performance of large- and mid-cap EM stocks. United Kingdom is represented by the MSCI United Kingdom (U.K.) Index, which tracks the performance of the large- and mid-cap segments of the U.K. market. Japan is represented by the MSCI Japan Index, which tracks the performance of the large- and mid-cap segments of the Japanese market. Emerging Latin America is represented by the MSCI Emerging Markets (EM) Latin America Index tracks the performance of large- and mid-cap stocks in Latin America. China is represented by the MSCI China Index, which tracks the performance of large- and mid-cap stocks in China. Hong Kong is represented by the MSCI Hong Kong Index, which tracks the performance of large- and mid-cap stocks in Hong Kong. AC APAC ex-Japan is represented by the MSCI All Country (AC) Asia Pacific ex Japan Index, which tracks the performance of large- and mid-cap stocks across developed and emerging markets in the Asia-Pacific region, excluding Japan. Global REITs are represented by the FTSE EPRA Nareit Developed Index, which tracks the performance of listed real estate companies and real estate investment trusts in developed markets on a free float-adjusted basis. Global listed infrastructure is represented by Dow Jones Brookfield Global Infrastructure Index, which tracks the performance of pure-play infrastructure companies globally and covers all sectors of the infrastructure market.
Fixed income
U.S. investment grade is represented by the Bloomberg U.S. Aggregate Bond Index, which tracks the performance of U.S. investment- grade bonds in government, asset-backed, and corporate debt markets. Canadian investment grade is represented by the FTSE Canada Universe Bond Index, which tracks the performance of marketable government and corporate bonds outstanding in the Canadian market. Global investment grade is represented by the Bloomberg Global Aggregate Bond Index, which tracks the performance of global investment-grade debt in fixed-rate treasury, government-related, corporate, and securitized bond markets. U.S. high yield is represented by the Intercontinental Exchange (ICE) Bank of America (BofA) U.S. High Yield Index, which tracks the performance of below-investment-grade U.S. dollar-denominated corporate bonds publicly issued in the U.S. domestic market and includes issues with a credit rating of BBB or below. U.S. leveraged loans is represented by the J.P. Morgan U.S. Liquid Index (JULI), which tracks the performance of a specific corporate bond or sector against the subset of the most liquid bonds in the investment-grade market. Emerging markets debt is represented by a combination of the J.P. Morgan EMBI Global Diversified Index, which tracks the performance of U.S. dollar-denominated Brady bonds, Eurobonds, and traded loans issued by sovereign and quasisovereign entities, capping exposure to countries with larger amounts of outstanding debt; the J.P. Morgan Corporate Emerging Markets Bond Index (CEMBI), which tracks the performance of U.S. dollar-denominated debt issued by EM corporations; the J.P. Morgan Government Bond Index-Emerging Market (GBI-EM) Broad Index, which tracks the performance of local currency EM government bonds. Asia credit high yield is represented by the J.P. Morgan Asia Credit Index, which tracks total returns for actively traded U.S. dollar-denominated debt instruments in the Asia ex-Japan region. Asia investment grade is represented by the J.P. Morgan Asia Credit Index Investment Grade Corporate Index, which tracks the credit spreads of Asian investment-grade (IG) credit.
Private assets
U.S. real estate is represented by the MSCI U.S. Quarterly Property Index (Unfrozen), which tracks unlevered total returns of directly held property investments in the United States from one valuation to the next. European real estate is represented the MSCI Europe Quarterly Property Index (Unfrozen), which tracks unlevered total returns of directly held property investments in Europe from one valuation to the next. Private infrastructure is represented by the Burgiss Global Infrastructure Funds Index, which is calculated from the Burgiss Manager Index, one of the most comprehensive datasets of private capital funds, funds of funds, and their holdings. Farmland is represented by the NCREIF Farmland Index, which tracks the performance of farmland properties held by NCREIF members. Timberland is represented by the NCREIF Timberland Index, which tracks the performance of timberland properties held by NCREIF members. Private equity is represented by the State Street Private Equity Index (SSPEI), which tracks the performance of high-quality primary PE in a timely manner. Buyouts are represented by the State Street Private Equity (SSPE) Buyout Index, which is a subset of the SSPEI and is limited to the PE funds categorized as buyout. Venture capital is represented by the State Street Private Equity (SSPE) Venture Capital Index, which is a subset of the SSPEI and is limited to the PE funds categorized as venture capital. Private credit is represented by the State Street Private Equity (SSPE) Private Credit Index, which is a subset of the SSPEI and is limited to the PE funds categorized as private credit.
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