- Co-Head of Multi-Asset Platform
Hong Kong (香港), Individual
Change
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It's been an uncertain few years for investors, who have had to contend with COVID, higher inflation and the prospect of a recession. In this environment, it made sense to stay in the relative comfort of high-yielding cash rather than take on the potential volatility of bonds or equities. However, we think the outlook has changed. Looking ahead, we believe investors can expect a resilient economy, a solid outlook for growth and a positive environment for risk assets. Recent election results in the US and Japan, and the prospect of stimulative policy measures from China, have further reduced uncertainty and bolstered this positive outlook.
What does a changed outlook mean for investors? Here are three ideas to explore for 2025.
1. A more optimistic outlook should prompt investors to reassess portfolios.
There’s a famous quote that is often attributed to John Maynard Keynes: “When the facts change, I change my mind”. Being in cash was the right call when the markets were worried about a recession and rates were going up. Now, markets are not worried about a recession and rates are coming down. The facts have changed. Have investors changed their minds?
We think 2025 should be a signal for investors to assess whether their portfolios have changed to reflect a more encouraging outlook. A soft-landing, no-recession scenario has potentially positive implications for equities in particular, but we also believe the case for fixed income remains strong. In rate-cutting regimes, high-quality fixed income has tended to have upside regardless of economic environment, making it an important risk mitigator.
Figure 1
Key takeaway: Put simply, we think it’s time for investors to consider whether their portfolios are keeping pace with a more positive outlook. This could be about taking the next step, whether that next step is moving from cash to bonds, moving from cash to bonds and equities, or adding equities to a bond portfolio — all the while considering appropriate levels of diversification and risk mitigation.
2. If you haven’t yet moved out of cash, it’s not too late to benefit from fixed income.
Amid persistent volatility and uncertainty, not all investors have embraced a shift out of cash. The ones that have already moved out of cash into bonds have likely captured better returns relative to those they would have received in cash, especially if they invested before the first rate cut.
However, even if investors haven’t yet moved out of cash, it’s still not too late to benefit from fixed income. Now that the tide has turned on rates, we see an additional impetus to invest in fixed income, with core fixed income, and particularly credit, looking increasingly attractive from both an income and capital protection perspective.
As the chart below shows, a fixed income allocation has historically outperformed cash following the end of the rate-hiking cycle. One reason for this is that staying in cash exposes investors to duration risk: when interest rates come down, investors could lose out on the additional return they could receive from holding some duration in their portfolios. Rate cuts also expose cash investors to reinvestment risk. As yields start to drop, cash investors will receive progressively lower short-term rates, faring worse than a bond investor who had managed to lock in higher yields for longer.
Figure 2
We believe fixed income will continue to be a key theme in 2025. Higher yields mean that fixed income now provides opportunities to earn income without taking too much credit or duration risk. This is especially relevant in a world where further interest-rate volatility is to be expected as the market navigates the potential impact of a Trump presidency and its implications for rates, inflation and the US budget deficit.
Key takeaway: Fixed income remains attractive, especially in a higher-yielding world. A flexible approach, providing the ability to dynamically capitalise on fixed income opportunities as they arise, could be particularly rewarding in this environment of increased interest-rate volatility.
3. Consider tapping into increased growth potential with equities.
Is the improving economic outlook a cue to move into equities while maintaining an allocation to fixed income? While some volatility persists, we think steady economic growth, low recession risk and largely falling inflation in developed markets means that companies should be well-positioned to achieve robust earnings growth. Following the recent rate cuts by the Fed and the People’s Bank of China, we expect most central banks to loosen monetary policy over the next 12 months, which should further support equities.
Market dynamics have also begun to change. The AI boom accelerated market concentration but the "Magnificent Seven" have recently begun to loosen their grip. Over the next year, earnings growth is expected to broaden in other sectors. We also anticipate that over time, the benefits of AI should be realised more widely as other sectors and companies begin to leverage this technology. Now, a broader array of stocks and sectors outperform the market, and rate cuts and lower yields should support companies more broadly.
Figure 3
Dispersion can potentially create a more positive environment for active management, as in-depth research can help identify outperformers across more diverse stocks and sectors. However, volatility and uncertainty remain. Event-related risks — such as political turmoil or regional conflicts — could challenge the outlook, meaning diversification and downside protection with a focus on quality remain crucial.
Key takeaway: Broadening economic growth should drive a broadening of fundamental performance across sectors and markets, creating opportunities for active equity investors. In a volatile geopolitical and market environment, approaches that focus on quality or stability may help drive capital appreciation while minimising downside risk.
Bottom line
As we approach 2025, we believe markets are embracing a more optimistic outlook. Investors should consider doing the same. Uncertainty is part of the new economic era, so investors should keep a firm eye on managing downside risk as they seek to reap the benefits of higher growth ahead. But rather than leaning too heavily on cash to do that work, we think investors should increase the resilience of their portfolio through diversification across high-quality assets and the use of research-based approaches that encompass multiple perspectives.
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