Key market forces – a buoyant US economy, significant opportunities in artificial intelligence, and the renewed appeal of fixed income – are likely to shape portfolios in the year ahead, according to Capital Group’s 2025 investment outlook.
The outlook says the US economy continues to show resilience, and appears to be “aging in reverse” as it transitions from late-cycle characteristics back to mid-cycle. Meanwhile, the world’s major economies are heading down divergent paths in 2025, and America’s role as the chief driver of global growth may expand further.
“Instead of falling into recession, as many predicted a year ago, the US economy remains strong, leading the world at a time when others are stumbling,” comments Martin Romo, Capital Group’s Chief Investment Officer. “Looking ahead there are meaningful opportunities for investors who focus on flexibility and research-driven active management. Successful investing is a long-term endeavor, and while it can be easy to retreat to the sidelines when faced with market gyrations or geopolitical uncertainty, the best approach is to stay invested and remain focused on those long-terms goals, without being distracted by the daily noise.”
Capital Group’s 2025 Investment Outlook describes the major investment themes impacting global markets and asset classes, as well as global inflation trends and where to consider investing in a rate cutting environment. Pramod Atluri, fixed income portfolio manager, comments, “The Fed will no longer be as centre stage. Interest rates don’t appear very restrictive to economic growth.”
Below are the thoughts of Capital Group and its individual fund managers:
Equity
- AI may be overhyped and bigger than you think. “The so-called hyperscalers — Alphabet, Amazon, Meta, and Microsoft — are spending about half of their capex budget on technology and half on buying land, constructing as many data centers as possible near reliable power and locking in long-term contracts with energy suppliers. That should provide investment opportunity for years,” comments equity portfolio manager Mark Casey.
- Dividend-paying stocks are gaining renewed investor interest. “I am looking for opportunities to invest in dividend payers that have been left behind by the market. These include forgotten pharma, or drugmakers that have been ignored amid the market focus on weight loss treatments, as well as utilities and select banks,” says equity portfolio manager Cheryl Frank.
- Small-cap stocks: “The valuation disconnect between small and larger stocks is one of the highest we’ve seen. There are a lot of innovative companies reasonably priced relative to larger companies associated with well-known market themes. I believe certain small caps are poised for a comeback,” says equity portfolio manager Julian Abdey.
- A capital expenditure super-cycle is being driven by a wave of global trends beyond technology. “These trends represent multi-decade investment opportunities, and we are only in the early innings. Europe is home to some industrial powerhouses solidifying their foothold in areas ripe for potential long-term global growth,” comments equity portfolio manager Lara Pellini.
- Investors will need to dig deeper to discover opportunities in emerging markets. India and China present distinct investment opportunities and risks, with India’s tech boom and China’s consumer market each driving growth.
- Japanese companies unlocking excess cash to reward investors. As corporate improvements spread, stronger returns are expected across a wider spectrum of stocks as more companies focus on earnings growth and dividends. Cash ratios are falling as businesses return excess cash to shareholders in the form of dividends.
Fixed Income
- Bond income potential may have staying power. “In today’s rate environment, investors can capture a healthy level of income within high-quality bonds. Security selection may be a driver of return, with attractive opportunities in agency mortgage bonds and securitised credit,” comments fixed income portfolio manager Vince Gonzales.
- Bonds are also reestablishing their role as a stabilizing force. “The Federal Reserve is focused on supporting labour markets now that inflation is near target. All else equal, lower policy rates should be positive for risk markets and the economy. Bonds are in a position to offer diversification benefits again,” says fixed income portfolio manager Tim Ng.
- Economic tailwinds will support corporate and high-yield bonds. “Although there are weak spots emerging, Fed rate cuts may help mitigate the pace of a potential economic slowdown. I think economic growth may slow a year from today, so it’s important to identify which businesses could be most impacted,” says fixed income portfolio manager David Daigle.
- Emerging markets debt shows resilience. “Many major EMs have tools at their disposal — better reserves, positive real rates with room to ease, fewer imbalances than developed markets and fair-to-undervalued exchange rates. There’s policy flexibility to weather the storm if needed,” says fixed income portfolio manager Kirstie Spence.
“I tend to think about the world in terms of tailwinds and headwinds,” says Capital Group portfolio manager Rob Lovelace. “The U.S. has plenty of tailwinds at the economic level, industry level and company level, while Europe and China are facing real headwinds at the moment. As we embark on a new year, it’s up to us to apply our decades of active investing experience to uncover the investment opportunities of the future.”
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