Aviva Investors: the year 2025 will be marked by strong political uncertainty

Aviva Investors: the year 2025 will be marked by strong political uncertainty
Aviva Investors: the year 2025 will be marked by strong political uncertainty

The asset management firm’s investment team expects the pace and extent of monetary easing to differ from country to country.

  • Trade policy will be a crucial factor over the next twelve months, with potential tariffs having impacts ranging from minor to very damaging.
  • The Aviva Investors investment team expects the pace and extent of monetary easing to differ from country to country.
  • The team prefers to approach 2025 overweight US stocks and the US dollar, as well as UK government bonds.

Aviva Investors, the global asset management business of Aviva PLC (‘Aviva’), expects 2025 to be fraught with significant political uncertainty. At the global economic level, this could lead to a wide range of possible situations, both positive and negative.

Moreover, Trump’s return to the White House is expected to be accompanied by a series of major changes across all areas of the policy field: from trade, to tax and spending, to regulation, to immigration and foreign policy. All of these aspects taken in isolation could already have significant consequences, so their sequence and combined effects will pose an extremely difficult challenge for markets. However, if the path to take to confront them is clear to each of them, the timetable and the scale of the task are not.

The increased use of customs tariffs is a telling example for the year to come. Throughout the presidential election campaign, there was talk of imposing tariffs of 60% on all imports from China, and 10% on all other imports. Then, more recently, Trump brandished a new threat of 25% customs tariffs on all Canadian and Mexican goods heading to the United States, and an additional 10% on those coming from China (thus targeting the three main trading partners of the United States). United States) if these countries do not stem the flow of illegal immigration and illicit drugs. The answer to whether these threats represent a realistic approach to tariffs likely depends on what ultimately motivates them. If they are used as a means of pressure in a negotiation process, their effect may not last or these measures may never be applied. But if they are an attempt to dissociate from key trading partners, then it seems more likely that new tariffs will be applied, but not necessarily on the scale announced. Whatever decisions the U.S. government makes, it is likely that affected countries will respond, either conciliatory in some cases or taking retaliatory measures. Therefore, we believe that trade policy is likely to weigh on global growth.

Other policy measures being considered could, however, be positive for growth, particularly in the United States. The extension of personal income tax cuts (expected to expire at the end of 2025), as well as the provision of new tax breaks for individuals and businesses, should support a further acceleration of US growth in 2026. Regulatory changes could also help boost productivity and growth. The reaction of US stocks to the presidential election result (they gained around 5%) suggests that these other factors, along with continued strong economic performance, are more important drivers in terms of the economic outlook. More generally, Aviva Investors’ central scenario forecasts global growth of around 3% in 2025 and 2026.

Meanwhile, Europe faces the twin challenges of tougher trade relations with the United States and slowing Chinese growth. Added to this is the potential pressure exerted by the United States for the countries of the old continent to reduce their dependence on China as a trading partner. While the eurozone as a whole has recovered reasonably well from the 2022/23 energy crisis, this is not the case for Germany. Industrial production remains weak, with structural cost challenges and fierce competition in the automotive sector, driven by China’s rise as a global exporter of electric vehicles. Here again, politicians will have to rise to the challenge, with a likely relaxation of fiscal rules in Germany, coming following the federal elections in February, and possibly new funds made available by the EU to support the defense sector and other fields.

In the UK, growth and inflation turned out to be slightly better than expected in 2024. The new government has increased taxes and spending – the latter more than tax take – in order to boost growth in 2025. It However, there is uncertainty over how businesses will respond to the increase in national insurance contributions, a measure which risks having a negative impact on both wage growth and employment. The United Kingdom could also be targeted by the new US customs duties, at least in certain sectors, but it will probably have little budgetary room to maneuver to cushion the effects they will have on the industrial fabric. We forecast European growth of around 1.2% in 2025, with inflation close to the 2% target.

When it comes to asset allocation, the Aviva Investors investment team prefers to be overweight US stocks, despite their high valuations. Profits are expected to be the main driver of growth next year, with US companies more likely to perform better than the rest of the world. However, the theme of artificial intelligence will remain a key driver for 2025, as very large data centers, called “hypercomputers,” continue to invest heavily and companies seek to advance the adoption of AI. The team prefers to be slightly overweight duration, with a preference for gilts, as it expects that in 2025 the Bank of England will cut rates more sharply than the market expects, based on inflation prospects. weaker and more timid growth than expected. On the other hand, the team is slightly underweight Japanese government bonds (JGB), because in this country the inflation outlook is consistent with a faster normalization of rates than the JGB curve suggests. The team is broadly credit neutral, with overweights in the high yield segment, funded by underweights in the investment grade segment. This reflects the relative gap quite well. Both areas are tight by historical benchmarks, but with late-cycle momentum likely to support these spreads next year, the expected recovery in the high yield segment is more attractive. Finally, it expects the US dollar to appreciate in 2025, particularly against Asian currencies, as the effects of US tariffs are felt and US outperformance boosts flows. of exchanges.

Michael Grady, head of investment strategy and chief economist at Aviva Investors, explains: “The economic outlook for 2025 is dominated by uncertainty, which for markets suggests a wide range of possible developments over the of the next twelve months. We believe that the first answers will be provided very soon and that President Trump’s political orientations will become clearer after his return to the White House.

“The development of US tariffs will be a particularly important element to monitor in view of the global economic outlook for the next twelve months. It remains to be seen whether some of the proposed levies will actually be implemented. Whatever the outcome, we expect affected countries to respond accordingly, creating a tense and uncertain political environment that will likely ultimately weigh on global growth.”

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