January 14, 2025
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.
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
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-year and long-term (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 refer 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.
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
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