Asset allocation in 2025: Between optimism and uncertainty

The year 2024 ends with significant economic disparities between regions. Which asset classes should be favoured for 2025? 

Global growth continues at a slow pace, although the economic landscape remains fragmented. While the United States enjoys strong activity, the eurozone is struggling to make headway and China is suffering from sluggish consumption. Geopolitical tensions and increasing political uncertainty in several countries are likely to accentuate these divergences in 2025. Equity market performance in 2024 has already largely reflected these growth disparities between regions. As 2024 draws to a close, sentiment in the US market is close to euphoric, while investors remain underexposed to European and emerging market equities. It is hard not to anticipate a continuation of these trends into 2025: there is little reason to challenge these dynamics until more is known about Donald Trump’s policies. However, opportunities may lie in assets currently perceived as undervalued or risky.

Our asset allocation at the start of 2025  

Our central scenario assumes a soft landing for global growth. Major central banks have entered a new cycle of monetary easing and are poised to support economic activity as needed. Meanwhile, China’s announcement of economic stimulus measures in late 2024 sent a strong signal. The biggest risk to this scenario is Donald Trump’s return to the White House in January, as it remains to be seen which of his many campaign promises – on tariffs, immigration policy, tax cuts and deregulation – will actually be kept. A “hardline” approach to immigration and tariffs could derail these favourable prospects, weakening global growth and pushing inflation higher. Conversely, a more moderate version of his policies would leave our overall forecasts for growth and inflation largely intact. 

Positive on equities 

Against this backdrop, our allocation remains positive on equities compared to bonds. We particularly favour US equities: although they have already had a good run and valuations reflect optimism following Trump’s victory, they remain more attractive than those of other developed countries, given the resilience of the US economy and corporate earnings. We are increasing our weighting in small- and mid-cap companies, cyclical sectors like industrials, and financials, which should benefit most from Trump’s policies which are seen as favourable to the domestic market. We remain neutral on technology stocks, as their valuations leave little room for additional positive surprises despite strong earnings growth. 

We are underweight on European equities, where we see limited prospects for earnings growth. Europe lags behind the United States in terms of investment and productivity gains, while political divisions in France and Germany persist. For European markets to regain investor interest, the region will need better growth prospects, Germany will have to ease its fiscal policy, and trade tensions with the USA will need to be well managed – which is achievable, but far from certain. Outside the US, our preference is for emerging markets, whose valuations are highly attractive but constrained by US interest rates and the strength of the dollar. US tariffs remain the primary risk for the region. However, Trump’s early appointments and announcements suggest a willingness to negotiate rather than pursue a full-blown trade war, which would have a negative impact on US growth and inflation. The Chinese government's announcements should help stabilise the country’s economy and benefit the broader region. Lastly, we remain neutral on Japan. 

Positive on European government bonds, negative on US bonds  

In Europe, we maintain exposure to long-term German government bonds. With weak growth expected for 2025 and the European Central Bank ready to lower rates further if necessary, holding risk-free government bonds offers the added benefit of protecting a diversified portfolio against growth disappointments. On the other hand, we remain cautious on French bonds, pending an agreement on the 2025 budget, and prefer certain countries such as Spain, where growth remains robust. In contrast, we are reducing our exposure to long-term US bonds. While US interest rates have stabilised since Trump’s election, the risk of rate increases persists, depending on the policies the new president implements. The divergence between US and European monetary policies is likely to persist. This strategy also protects a diversified portfolio against rising inflation expectations. 

In credit, we prefer Europe  

In credit, i.e. corporate bonds, we prefer Europe over the United States, given its more favourable rate environment and higher credit spreads1. For emerging market debt, spreads appear attractive, but performance, particularly in local currencies, will depend heavily on US policy decisions (interest rates, dollar strength, and potential tariff impacts). 

Currency trends at the heart of trade negotiations  

The US dollar appreciated by 5% against the euro this year2. While a weaker dollar would benefit US companies’ competitiveness, Trump’s campaign policies could strengthen the currency instead. This paradox may limit the dollar’s appreciation potential. Currencies will play a central role in trade negotiations with key US partners. The Chinese yuan, currently near its lows, could appreciate if China’s economy rebounds and compromises are reached with the US on trade. Similarly, the yen may strengthen as the dollar stabilises. 

Which strategies should be favoured for portfolio diversification?  

Gold retains its role as a diversification and protection tool in asset allocation, despite being partially overshadowed by cryptocurrencies since Trump’s election and penalised by the strong dollar and rising US real interest rates. Any weakness in gold prices would be an opportunity for us to increase exposure to precious metals. 

Certain alternative strategies could also be considered in 2025 asset allocation. We are thinking in particular of “market neutral” strategies, which aim to benefit from increasing market volatility and asset dispersion within a single market while limiting direct market exposure, as well as “risk arbitrage”, which could benefit from a resurgence in M&A activity in the US. 

Conclusion  

Each year brings new uncertainties to replace the old ones. The economic context has finally normalised, with a soft landing for global growth and inflation easing out of the danger zone for economic stability. However, Donald Trump’s election introduces fresh risks and uncertainties, both economic and political. Investors may find reassurance in the likelihood that financial markets, to which Trump appears particularly attuned, could serve as a check against excessively extreme policy choices.