Investment Monthly
Volatile Goldilocks
11 February 2025
Key takeaways
- Markets face a broadly constructive “Volatile Goldilocks” backdrop of no recession, further rate cuts, resilient profits, but more market volatility
- Global conditions are supportive of further stock market gains, but risky assets are vulnerable to global growth headwinds, investor risk aversion, and higher bond yields, while parts of the market, such as tech, look richly priced
- Our baseline macro scenario could see a further rotation into laggard sectors and regions, including Emerging and Frontier markets
- Diversification into alternatives such as hedge funds, private credit, and defensive real assets can build portfolio resilience
Macro Outlook
- Our baseline macro scenario for western economies sees growth moderating to around 2%, continuing disinflation, and gradual policy easing
- Global policy uncertainty has picked-up, but it’s unclear how policy will develop or how economies will respond
- In China, officials have set a pro-growth policy tone for 2025. More demand-side stimulus, further efforts to stabilise the property sector, and structural reforms to rebalance the economy could support the outlook
- We expect India to be one of the world’s fastest-growing large economies in 2025, and see improving macro fundamentals in South East Asia and MENA
Policy Outlook
- The US Federal Reserve held rates steady in January. Further rate cuts are still likely in 2025, but policymakers may wait until mid-year before doing so, and proceed cautiously thereafter
- The Bank of England is expected to cut rates in response to stagnating growth, with the pace of easing remaining gradual
- The Bank of Japan increased rates by 25bp to 0.5% in January, continuing its path to policy normalisation, with further hikes expected later this year
- Chinese policy support – including liquidity, fiscal/credit, structural measures – can boost the economy out of the deflation trap