Podcast: What's in store for 2025?
Johanna Kyrklund, Nils Rode and George Brown discuss the themes investors should keep an eye on 2025.
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[00:00:00.560] - Announcer
Welcome to the Investor Download, the podcast about the themes driving markets and the economy now and in the future. I'm your host, David Brett.
[00:00:24.030] - David Brett
2024 was a good year for markets, and despite all the geopolitical uncertainty, the global economy remained resilient. But what about the year ahead? On this show, I'm joined by Schroders Group CIO and CEO of Public Markets, Johanna Kyrklund. Johanna will take us through what to expect in stock markets, bonds, and commodities in 2025. Nils Rode, Schroders CIO in private markets, also joins us. He'll discuss why he believes the coming year could be a vintage one for private investors. But first up, it's the economy with Schroders' Economist, George Brown.
[00:00:59.980] - Announcer
On Apple Podcasts, Spotify, or wherever you get your podcasts, you're listening to the investor Download.
[00:01:08.760] - David Brett
Despite all that's been going on geopolitically, growth has been resilient in the global economy in 2024. But divergence has been a key part of that with US exceptionalism helping it diverge from the rest of the world. But will it be the same story in 2025?
[00:01:25.570] - George Brown
Yes. Growth has been really resilient in the global economy, particularly over the past year. But the divergence has been a key part of that. The US has really diverged from the rest of the world in terms of this exceptionalism. But where the US is exceptional is through the growth side. The household has very much been the driver of that. Whilst you've seen some weakness in other parts of the world, in the US, the consumer has remained really, really strong. From a macro perspective, it has been on the growth front. Now, looking ahead, we think that exceptionalism is going to continue under Trump's policies. But at the same time, we think I think that that gap with the world is going to continue to diverge because Trump's policy as well is going to be headwinds for the rest of the world. We also think the export cycle is going to turn. Countries like China, which is obviously heavily dependent on manufacturing, they're going to suffer as a consequence.
[00:02:14.840] - David Brett
Speaking of Trump, the incoming President of the US, how much of what he's saying should we take as rhetoric and bluster, and how much as investors should we take seriously?
[00:02:25.440] - George Brown
Going into next year, of course, there's so much uncertainty with the Trump administration. You have to make certain There's certain assumptions there. Of course, we do have our scenarios around our baseline, which we do have, let's say, an extreme Trump scenario in which he does everything that he says he's going to do, the Ron Seal Trump, if you like. But our baseline assumption is that actually Trump might be quite benign, at least for the US perspective, and actually that some of those extreme inclinations will be moderated by the slim majorities in Congress and the checks and balances in the system.
[00:02:57.860] - David Brett
Trump has been talking loudly about tariffs and bringing manufacturing home again, all of which points to more expensive, not cheaper goods for the consumer. Will inflation, after seemingly being tamed in 2024, rear its head again in the next 12 months?
[00:03:12.300] - George Brown
We think that inflation is going to be sticky in a lot of advanced economies such that we think that central banks are going to have less scope to cut rates than the market predicts. The likes of the Fed, we think are only going to cut rates once, maybe next year. The ECB, the Bank of England, maybe two cuts. In fact, we actually think there might be a situation in which the might have to ultimately start hiking rates in 2026.
[00:03:32.600] - David Brett
If the interest rate cycle does show signs of having to reverse as inflation rises, what impact might that have on public markets? That's what we'll discuss with Johanna Kyrklund in part 2.
[00:03:44.610] - Announcer
Get in touch with us by email at schroderspodcasts@schroders.com or visit our website, schroders.om/theinvestordownload.
[00:03:57.250] - David Brett
Public markets enjoyed a good year in 2024. But what does 2025 hold for investors?
[00:04:03.660] - Johanna Kyrklund
Clearly, we've had a very strong year for markets. The question really is, can equity prices, in particular, continue to rise in 2025? I think that if we were just looking at it from an economic perspective, the environment is still quite benign, actually. With inflation rolling over, we've seen a number of central banks start to cut rates, which is very helpful. It helps the discount rate for markets, but also encourages investors to move up the risk curve in search for better returns.
[00:04:32.730] - David Brett
We've talked about US exceptionalism in the economy, which George sees continuing into 2025. That seems to have been reflected in equity returns. Will that continue this year?
[00:04:44.230] - Johanna Kyrklund
As I said, an environment of a soft landing is quite benign for markets. Rates coming down also helps valuations. Now, the challenge here is that the valuation of the S&P 500 in particular is looking very stretched at this point. We need to be a little bit careful there. A lot of good news has been priced in to the S&P 500. Investors have got used to these very narrow markets led by a small number of stocks.
[00:05:06.930] - David Brett
I think we're referring mainly to the so-called Magnificent Seven. Can their run of form continue?
[00:05:12.930] - Johanna Kyrklund
Interestingly, I don't think they're seven anymore. I think it's more like six. It's varied over the year. I think that even Magnificent Seven was very much a story for 2023. Even this year, it's been a bit dented. I think they've continued to do well, some of them, but really, the peak in that story was probably around July, June, July this year. I still think there's potential for them to go up. When we look at the numbers compared to the internet bubble that we had in the late '90s, compared to then, they actually do have a lot of earnings. We saw this with NVIDIA as well. They actually are delivering very strong earnings. The question is how much is baked in in terms of expectation? But at least there are plenty of earnings there, which was not the case during the internet bubble. So they could continue to rise. But I think really it's about looking for other opportunities. For example, this year, US utilities has been a very attractive sector. Actually, we're seeing that change now. Really, since the summer, we've actually seen a much more interesting path for markets with different sectors performing at different times.
[00:06:11.730] - Johanna Kyrklund
I'd argue that if you move away from the mega caps in the United States and look internationally, the valuations do look more attractive.
[00:06:19.040] - David Brett
However, despite the outlook seemingly benign for markets in 2025, geopolitical risks are abundant. Top of the agenda for investors, at least for now, appears to be the impact of incoming President Trump. How might his policies affect the outlook for the next 12 months?
[00:06:35.930] - Johanna Kyrklund
Limited Trump represents a situation where we get the deregulation from Trump as well as corporate tax cuts, and that would actually be a little bit reflationary and quite positive for markets. In fact, we've seen a bit of that getting priced in in recent weeks, even heading into the election. We then have what we call full-blown Trump. This is where we start to see more significant tariffs being imposed around the world. Now, I think that here, you can see that this in the end would be a hit to growth. In the first instance, it would increase inflation, but actually it would eventually bring growth down relative to our forecasts because of the impact of global trade, but also because higher prices could dent the US consumer. Generally, an environment where global trade is contracting is one where the pie is shrinking in some sense. We need to be alert to some of the growth risks implied by some of these policies.
[00:07:28.040] - David Brett
If growth becomes an issue, then it could all those tax cuts and spending increases that have been proposed become a problem for markets?
[00:07:35.680] - Johanna Kyrklund
There's been concerns about very high levels of government spending. We know the deficits are high. This would really be a scenario where essentially the US bond market revolves against further fiscal spending. We don't think that's a big risk for 2025 because, as I said, inflation is moving in the right direction for now. This takes a bit of pressure off rates, and I think that this is potentially more medium-term risk.
[00:07:57.130] - David Brett
Are bonds a safe bet right for investors to own?
[00:08:01.340] - Johanna Kyrklund
The point is that actually in this environment, I think there is still a role for bonds. They're looking quite cheap and they offer an attractive yield. But the point is not for diversification, which really brings me on to the next theme. If you're looking for diversifying investments, we've been advocating the use of commodity-related investments, particularly gold. People often ask me what to do about a tense geopolitical environment. I would argue it's impossible to trade, but I think that owning diversifying investments that improve your portfolio resilience is very important. Compared to the last decade when commodities really offered no diversification, in this decade, typically we have seen benefits from owning commodities from a diversifying standpoint. This is for two reasons. First, if you think about broader commodities like oil, the main transmission mechanism from geopolitical tension to growth and markets is via the commodity channels. We saw this with the Ukraine back in 2022. I think in general, gold is also a good store of value, particularly given the profligate policies pursued by all the major governments at the moment, a lot of fiscal spending, which, as I said, undermines the case for bonds as a diversifier.
[00:09:08.720] - Johanna Kyrklund
I think gold in that context provides a better alternative.
[00:09:12.460] - David Brett
Diversification doesn't just mean looking at assets that are tradable on public markets.
[00:09:17.020] - David Brett
Private markets are very much becoming a consideration for investors. And that's what we'll discuss in the final part of the show with Nils Rode.
[00:09:30.580] - David Brett
It's hard to ignore how much private markets are being turned to for a source of returns. One report by Bain & Company estimated private markets will constitute something like 30% of assets under management by 2032. And while private assets remain the purview of mainly professional investors, regulators are taking steps to make them more accessible to retail investors. They're also intertwined with public markets. For instance, most of the Magnificent Seven began life as private companies before being listed on public markets. Nils, what year will 2025 be for private markets?
[00:10:05.910] - Nils Rode
We believe that 2025 will be an especially attractive vintage year.
[00:10:11.710] - David Brett
Why is that?
[00:10:12.190] - Nils Rode
What we look at is cycles. And what we see is that there are three cycles that align favourably. So the first one being the economic cycle, which is what Johanna spoke about. So the expectations of interest rates coming down further, normalising and the economy moving again into the expansion phase that provides tailwind. Even more important than that is the second cycle, which is the private market cycle. That has historically been a good early indicator. And what has happened there is that for private markets, we have had a slowdown now for three years from the end of 2021 peak. Fundraising has come down, investment activity has come down, valuations have come down, different from the stock markets. And valuations coming down is a good thing for new investments. And we also see signs of bottoming in various areas. The third cycle we look at, which is also favourable, is the technology cycle, where now artificial Artificial Intelligence is the new big topic and will be the new topic for the next 5 to 10 years or even longer than that. And it's on the scale of other big technology disruptions like the personal computer, the Internet, the smartphone, and the beginning of such a cycle and such a wave is always especially attractive from an investment perspective.
[00:11:37.060] - David Brett
Why is that so important in private markets?
[00:11:39.690] - Nils Rode
Really, most of the innovation in artificial intelligence is currently taking place in venture great startups. If you look at pure play AI companies, nearly all of them are still private companies. Some will go public, but they haven't yet. Of course, big tech companies also have an important role in the tech stack, providing the chips, providing the data centre, and the infrastructure services that go with it. But what's happening now is that there are hundreds of startups being created that work on applications to bring artificial intelligence to consumers in a way that is useful, and also to help enterprises to implement artificial intelligence and change the processes, which is not easy. That's why we are still very much at the beginning, and it's driven by private market investments, by venture capital investments.
[00:12:29.190] - David Brett
Historically, investors have been attracted to private markets for their income opportunities. But in a world of geopolitical uncertainty, should they be considered, too, as a form of protection for investors?
[00:12:39.530] - Nils Rode
In terms of resilience, private markets have historically added a lot of resilience to investors' portfolios. We've very recently published a study on private equity, where we look in a very data-driven way at private equity resilience over the last 25 years during the major crisis. Where private equity has done well. And the same can also be said about other private market strategies. That's not possible to go back 25 years because for many of the other strategies, the data is not there because the strategies are younger.
[00:13:17.040] - David Brett
Why do they show such resilience?
[00:13:19.250] - Nils Rode
The way private market investments are structured with long-term time horizons and the according structures, there's less need for fire sales, and capital can drawn also during crisis. There are fundamental reasons. For example, private equity has a very different sector mix. There are strategies that have other risk profiles like insurance-linked securities with catastrophe risk or renewables with exposure to energy risk. And there are technical reasons. Private market valuations are valuations, not market prices, and that takes also some volatility out. So there are these three reasons for that resilience, which is one of the motivators to invest in private markets.
[00:14:01.400] - David Brett
Are there any other reasons 2025 could be a vintage year for private investors?
[00:14:06.330] - Nils Rode
The fourth topic I want to briefly touch upon is the nonfinancial impact that can be generated through private market investments. One important example is decarbonisation, which is driven by renewable energy investments, wind and solar infrastructure investments, which is a strongly growing market segment.
[00:14:29.380] - David Brett
But what about the the fact that some countries are openly retreating from proposed decarbonization targets and strategies?
[00:14:35.770] - Nils Rode
The trend towards decarbonization and the growth of renewable energy investments will continue, and that is driven largely by the economic rationale because renewable energy in many places of the world has become cost competitive. And it's also driven by the fact that many corporations have net zero targets and want to make sure that in their supply chain there's green energy and the recent rise of artificial intelligence and data centres and the required energy needs, but also electric vehicles and other reasons why electricity demand is going up will also be positive for renewable energy.
[00:15:19.840] - David Brett
So there it is, your guide to what to expect in 2025. And there'll be much more to come from us over the next 12 months. So keep listening.
[00:15:29.300] - David Brett
That was the show. We very much hope you enjoyed it. You can subscribe to the investor download wherever you get your podcasts. And if you want to get in touch with us, it's schroderspodcasts@schroders.com. And you can find out much, much more at schroders.com/insights. New shows drop every other Thursday at 05:00 PM UK time. In the meantime, keep safe and go well.
[00:15:53.720] - Announcer
The value of investments and the income from them may go down as well as up. And investors may not get back the amounts originally invested. Past performance is not a guide to future performance. The information is not an offer, solicitation, or recommendation of any funds, services, or products, or to adopt any investment strategy.
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