Thoughts for 2025 | Insight Investment

With the end of the year approaching, we provide our outlook for key asset classes in Thoughts for 2025. A key theme is our view that despite tight credit spreads, absolute yields remain attractive, and that markets are likely too optimistic on the depth of the easing cycle. The high level of yields means compounding can magnify fixed income returns over time, but be careful when buying currency-hedged share classes, as they may not perform in the way that you think they should.

• Real policy rates have moved from deep negative territory to the highest levels since before the global financial crisis, providing central banks with the flexibility to start easing. Although prudent rate cuts are necessary to underpin growth and ensure a soft landing, the exuberance of rate markets is questionable. Markets are now pricing in a faster easing cycle than previous crises, which seems at odds with an economy that is still growing and an equity market close to record highs. Unless economic data deteriorates significantly, markets may need to reassess expectations for both how rapidly rates will decline and the terminal level of rates.
• The outlook for global inflation remains uncertain despite the gravitation of headline rates towards central bank targets. We believe factors such as the shift from globalisation to deglobalisation will keep inflation structurally high in the coming years. In the US, sticky inflation, monitored by the Atlanta Fed, is declining at a slower rate than the headline consumer price index and has stabilised at around 3%. Stickier inflation is just one of the challenges facing central banks, with food prices and money supply turning upwards once again.
• Our regime-based framework became more neutral in the summer, and we adjusted our cyclical exposures downwards. However, we are conscious that easier monetary policy should support economic activity, potentially shifting us into a more positive growth regime in 2025. One concern we have is the lofty valuation of US equity markets, as history suggests valuations do matter. This may mean a more targeted approach to risk-asset allocations may be necessary in the year ahead.

We provide further thoughts on various segments of global credit markets and significant risks including nature risks in the full paper.