Invesco’s Global Market Strategy Office (GMS) has released its annual outlook for asset allocation for 2025.
Invesco’s Global Market Strategy Office (GMS) has released its annual outlook for asset allocation for 2025. This describes a constructive environment for financial markets, characterized by a combination of falling inflation, Monetary easing and increased growth – an environment in which higher returns are expected from riskier investments compared to more defensive alternatives.
“The global economy continues to grow despite everything. Barring a shock, falling inflation, central bank monetary easing, and accelerating monetary growth in the United States and the Eurozone indicate that the risk of an unexpected economic collapse is diminishing and that a recession in 2025 is not on the agenda. Therefore, we believe the coming year will be a good year for financial markets,” says Paul Jackson, global head of asset allocation research at Invesco.
GMS’s return forecasts for different asset classes are based on the assumption that global GDP growth in 2025 will move closer to the trend rate, while global inflation will decline toward central bank targets and major Western central banks will continue to reduce interest rates towards a “neutral” level.
Despite the constructive economic and political environment, expected returns are lower than a year ago due to strong price increases in some asset classes. “The biggest dilemma we face is that cyclical assets such as stocks and high-yield bonds have seen a second consecutive year of strong performance in 2024. As a result, some valuations are now overblown and we fear that a “Much of the monetary easing and economic recovery is already priced in,” says Jackson.
For example, U.S. stocks are very expensive in terms of market capitalization, and high-yield bond spreads are narrower than Invesco experts would normally expect at this point in the cycle. Additionally, the real price of gold has recently reached new highs. At the same time, the new government in the United States brings a lot of uncertainty when it comes to tax and trade policy as well as geopolitics.
Invesco’s Global Market Strategy Office uses an optimization process to balance risk and return. For the coming year, the result of this optimization clearly argues in favor of bank loans, investment grade bonds and commodities, and against gold and stocks.
“Stocks generally perform well in recoveries, but they have already had bright years in 2023 and 2024. Combined with the high valuations of the US stock market, this tempers our optimism for global stock returns,” says Jackson .
US stocks received a further boost from Donald Trump’s victory in the recent US presidential elections, likely in anticipation of a combination of tax cuts, less regulation and protectionism. However, Jackson sees several risks in this analysis: First, there is no clear link between corporate taxes and future stock returns. Second, tax cuts without offsetting funding could worsen the already dire budget situation, which could lead to higher bond yields. Greater protectionism could also fuel inflation, dampen growth and negatively impact the efficiency of U.S. businesses.
Additionally, Jackson views valuations as an important factor in future performance, and his analyzes report that U.S. stocks have historically performed poorly over the medium term when they were as expensive as they are now. The Invesco expert expects stock markets outside the US to perform better than the US market and sees attractive investment opportunities in China. “Recent policy initiatives in China suggest continued higher growth momentum than in Western industrialized countries, and we are optimistic that Chinese stocks will outperform as they still remain cheap,” says Jackson.
Unless a recession occurs, the Invesco expert sees little room for a sharp decline in long-term government bond yields next year and expects mostly steeper yield curves. For short-term investments, he prefers bank loans to cash investments. While money market rates have fallen, the high yields on bank loans argue for higher returns from this asset class compared to other assets with comparable volatility. “In our view, bank loans offer the best overall risk-return potential and we believe they will provide higher returns than all other global asset classes except commodities,” says Jackson. In the investment grade bond space, he expects UK bonds and emerging market bonds to perform best. Given the economic recovery, he expects high-yield bonds to perform relatively well, but notes that spreads are already tight.
Given the rate cuts by the US Federal Reserve (Fed) and the economic change looming in the United States, Jackson expects the US dollar, currently very strong, to lose its value. This could provide further impetus to industrial raw materials, which should also benefit from the economic acceleration. However, the Invesco expert doubts that these factors are enough to further support the price of gold, which he considers already very high.
According to Jackson, emerging markets could also benefit from easing monetary policy from the Fed and a weaker dollar. He views emerging market valuations as relatively attractive and expects above-average returns across most asset classes.
Although GMS’s outlook for asset allocation in 2025 paints an overall constructive picture, Jackson also sees some risks that investors should keep in mind. For example, the fiscal consolidation needed in many countries could dampen growth, and the global economy could be too fragile to survive a potential trade war. Additionally, inflation could rise sooner than expected if the economy accelerates, and a further increase in the already hugely inflated U.S. budget deficit could push U.S. government bond yields even higher and weaken the dollar. – especially if the new government questions the independence of the Fed. Overall, the Invesco expert is banking on a cautious expansion of engagement in risky assets in this context.
