
The new year ushers in a new US administration with policy changes on the horizon.
Portfolio Managers, Strategists and Executives from Natixis Investment Managers, AEW Capital Management, Flexstone Partners, Loomis Sayles, Mirova, Vaughan Nelson Investment Management provide 2025 Market Outlooks.
During 2024, the US economic backdrop shifted as inflation eased, the labor market cooled and the Fed began bringing down interest rates. The new year ushers in a new administration with policy changes on the horizon. Despite uncertainty about what those changes ultimately look like and how they may affect the economy, the market’s mood is optimistic based on expectations of continued growth bolstered by resilient consumer consumption.
We asked investment professionals from Natixis Investment Managers and its affiliated investment managers to predict where markets are headed this year and received views from across asset classes including private real estate, undervalued stocks, bonds and options writing strategies – as well as insight into private equity, ETFs, and retirement security trends. Here is what they expect in 2025:
AEW European research forecasts prime offices to offer best returns
Macro-economic and real estate sector fundamentals have improved, with lower inflation and central bank policy rate cuts. As these are priced into swap rates, reduced all-in borrowing costs have made real estate debt accretive to equity investors. Projected future reductions in bond yields are also expected to push down prime property yields and reverse recent capital value declines. The combined impact of rental growth and yield tightening has lifted our projected returns to 9.2% p.a. over the next five years, led by prime offices. These returns reflect our macro base case scenario and are more conservative than the slow and steady recovery seen post-GFC. Recent financial market pricing incorporates increased concerns for higher inflation and slower and fewer policy rate cuts in the short term. Assuming such short-term concerns are realized in the long term, our downside scenario might become more relevant. This downside scenario shows a 8.6% p.a. total return, a 0.6% p.a. reduction compared to the base case across our near 200 European markets covered.
By Hans Vrensen, Head of Research & Strategy Europe, AEW
Is the future of investing private?
In terms of macro drivers, interest rates have always been the key driver of private equity. Over the last two years, when interest rates increased steeply, we saw a deep downturn in private equity activity. Now we expect interest rates to continue to decrease, but still remain higher than over the past few years.
As a result, we see two implications for private assets and private equity in general: One is a rebound of activity, which we’ve seen over the last quarter or so in terms of deal flow and general M&A activity.
The second one, which is a little bit counterintuitive, is performance. We expect a continued decline in rates, but they will remain higher than those of the previous decade. High rates can be a necessary evil for private equity as they force investors to be more disciplined, and this discipline invariably translates into better performance.
Of course, private equity is not immune to volatility and periods of recession, such as we have experienced over the last two years. But the long-term outlook remains very positive. Indeed, there are some fantastic investment opportunities not least because of the energy transition and more generally technological innovations that will help deal with climate change.
Similarly, individual investors’ interest in private equity is also continuing to grow. The Eltif 2 label is expected to support the democratiSation of private assets in Europe, with the creation of semi-liquid evergreen funds. There are several issues that need to be considered carefully. There’s liquidity for one: despite the emergence of semi-liquid funds, these investment strategies remain fundamentally illiquid and therefore not necessarily advisable to everyone directly – except, through pension schemes.
So, is the future of investing private? I would argue that answer is yes because the world is private. Wherever you look, 80% plus of companies are in private hands and investors need private equity to finance that economy. Looking ahead, evolving regulations, energy transition, and growing interest from individual investors position private equity as the ideal asset class to lead the way forward in 2025 and beyond. In short, private equity has a bright future ahead.
By Eric Deram, Managing Partner, Flexstone Partners
Peering through the noise: Positioning for polatility in 2025
Two words come to mind when thinking about 2025: volatility and transactional. We see many paradoxes embedded in the Trump’s agenda that are hard to untangle and could lead to bouts of volatility. Extending tax cuts could stimulate consumption but also worsen the fiscal deficit. Immigration control could tighten labor markets but also raise wages. Tariffs could spark a trade war that could simultaneously curb demand and raise prices. We think it will pay to peer through the noise and focus on Trump’s goals and constraints. His actions might have more bark than bite, but we warn against complacency.
China is limping into 2025 nursing weak domestic consumption and a burst property bubble. Protectionism is a key threat. A full-blown trade war could potentially lead China to be a powerful disinflationary force to the rest of the world. The US and China could reach a grand bargain that defuses key fracture points between these rivals. More likely, the two engage in some trade skirmishes that lead to transactions. We expect more stimulus in 2025, but a bazooka is not likely unless a major trade war erupts.
Our portfolio positioning is guided by our secular and cyclical themes: demographics, security, and the need for massive investments related to electrification and climate. These forces will pressure government budgets, stoke inflation, and keep real rate structurally higher. Cyclically, we think US inflation is bottoming and the economy is down-shifting to a soft landing. We see the policy rate landing around 3.5%-4.0% by the end of 2025. The longer end of the curve should be anchored around its current level given the structural features of this economy.
The credit cycle remains firmly in the expansion/late cycle phase. Credit fundamentals remain buoyant, and we find it hard to foresee a material increase in credit losses. We don’t deny the skinniness of credit risk premiums, but these sort of low spread environments can persist for a long time. We think credit spreads will be a range trade in 2025 and we still see the BBB and BBB quality segments as offering the best risk/reward.
By Matt Eagan, CFA, EVP, Portfolio Manager and Head of the Full Discretion Team, Loomis, Sayles & Company
A Positive Outlook for Equities Despite Continuing Uncertainty in 2025
2024 was a year of economic and geopolitical uncertainty, and we expect that to continue in 2025. The US election and decisive win of Donald Trump provided more certainty on the outlook for the US economy, and we expect US and Asia to be the drivers of economic growth in 2025. Europe may face headwinds in the context of the Trump agenda and trade policy uncertainty. Germany’s industrial sector continues to struggle, while France grapples with political turmoil.
Geopolitical tensions, particularly in the Middle East and Ukraine, pose additional risks to market stability. The potential resurgence of inflation looms on the horizon, driven by Trump’s inflationary policies specifically around tariffs and immigration. Although the implementation and inflationary effect of these policies may take time to flow through to the real economy, we continue to work under the assumption of higher inflation, and therefore interest rates, for longer. In this context, we may see a strengthening of the U.S. dollar, benefiting European companies with substantial U.S. revenue exposure. In Asia, we see significant growth potential in India in the context of friendshoring and nearshoring. China is expected to stimulate its local economy, which should benefit infrastructure and commodity-related sectors.
We remain positive on the outlook for equities in 2025. In the U.S., equity valuations are reflecting a relatively positive economic scenario already, while in Europe, valuations on average are much lower, reflecting a more negative scenario. The German elections in February could be a trigger for economic reform, boosting valuations in Europe. If we see an end of the Russia-Ukraine conflict, that could also support economic growth in Europe.
Despite market fluctuations and policy changes, we maintain conviction in several long-term growth opportunities that we believe will be well supported in 2025 including:
- Growing demand for generative AI and automation driving increased energy needs, necessitating advancements in renewable energy and storage solutions.
- Health and unmet medical needs, including innovative solutions in diabetes and obesity care, oncology, and immunology.
- Anticipated regulatory focus on PFAS in water supplies will create opportunities for companies specializing in water quality and safety.
by Jens Peers, CIO and Portfolio Manager, Mirova US
US stocks likely up and bonds sideways in 2025
In 2024, we saw several interesting shifts in the economic backdrop including declining inflation, a cooling labor market, and resilient consumer consumption supported by rising real wages. While the Federal Reserve has maintained a relatively restrictive rate regime to manage inflation, we saw lower rates this Fall as the Fed tried to keep pace with normalizing inflation. Investments in AI and productivity gains were also notable, and the labor markets have entered a “don’t leave” phase where if you have a job, it’s relatively secure as layoffs are rare.
Earnings growth and multiple expansion were the biggest drivers of returns for the US equity market during 2024. While some may argue that valuations are at stretched levels, we think these valuations may be warranted reflecting the fact that US corporate margins are at historical highs and investors are willing to pay up for higher quality companies with stronger margins. What’s more, risk appetite does not appear stretched as many investors seem content to sit in money market funds earning 5%, unwilling to jump into equities which would fuel even higher prices.
As we enter the New Year, the labor market appears to be in statis as inflation (ex-shelter) continues to head lower, helping to push real wages higher. This results in more buying power for the US consumer. Because consumer consumption drives most of the growth in the US, it’s a very healthy place to be.
Looking ahead to 2025, our outlook remains positive with expectations of still slowing inflation and an easing labor market. Investment strategies will likely favor US equities with a balanced investment approach with using Treasuries to mitigate risk. We anticipate that further investments in AI will continue to boost productivity and economic growth. The stock market is expected to continue its upward trend, while the bond market is expected to earn its coupon.
by Jack Janasiewicz, Lead Strategist and Portfolio Manager, Natixis Investment Managers Solutions
Positive backdrop for US Small Cap Security Selection
We expect an acceleration in economic growth in the US in the first half of 2025. At the same time, there will be a modest increase in inflationary conditions. That doesn’t mean inflation accelerating back to mid to high single digits, but just moving away from the Fed’s target.
While the market has become used to narrative investing – such as AI, large caps, and energy – moving forward, it will be more nuanced and become more security specific. Many investors are seeking undervalued laggards, but we don’t think big pockets of undervaluation exist today.
US small caps are relatively less expensive than large caps but fairly valued on an absolute basis. The biggest impact in 2025 will be any material shifts in US Fiscal/Monetary policy and the potential for capital controls to increase outside the United States.
By Chris Wallis, Chief Executive Officer and Chief Investment Officer, Vaughan Nelson Investment Management
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