Annual outlook 2025 - change of perspective
Change of perspective
In 1989, the unforgettable Robin Williams played teacher John Keating in the movie “The Dead Poets Club.” This inspired his students to develop their own ideas and have the courage to take on new perspectives. He quoted the American writer Henry David Thoreau: “Most people live lives in quiet despair.” But what does this have to do with capital markets? We have had a remarkably enjoyable 2024 year behind us for investors with a global focus. Investing always also means showing courage — courage, as it is a commitment to the future. However, anyone who recently viewed the world exclusively from a national perspective, particularly through the lens of German economic news, may have felt close to the “quiet despair” described by Thoreau. Such moods lead to emotional decisions that rarely bring long-term success. Our approach, on the other hand, is to “get on the table,” as John Keating showed his students, and to broaden our view. We look at the world from different perspectives, carefully classify our impressions and implement them profitably for our investors. Despite all global challenges, 2024 was a successful stock year at index level, albeit with an unexpected script. At the start of the year, discussions were dominated by the expectation of a stable disinflation trend. It was assumed that this could enable comprehensive interest rate cuts (six to seven in the USA), which would boost equity valuations and make interest-bearing alternatives less attractive. Interest rate cuts actually took place, but to a much lesser extent than expected. In the summer, in view of stubborn inflation, there was even occasional speculation about interest rate hikes — particularly against the backdrop of a continued robust US labor market and rising wage demands. In the first half of the year, the hype surrounding artificial intelligence (AI) dominated the markets. The share price gains were primarily due to tech heavyweights, who benefited disproportionately from AI developments. This shows once again that “the” stock market does not exist. A closer look beneath the surface shows that structural problems in other sectors led to weak performance despite an overall positive environment. This differentiation will remain decisive in the future in order to correctly classify valuation shifts.
In the second half of the year, the focus shifted. The lack of extensive interest rate cuts led to critical questions as to whether billions in investments in AI can actually be amortized as hoped. In addition, the focus was on the US presidential election. With the economic policy programs of Trump and Harris, which both focused on debt-financed growth, the stock markets were largely able to survive. While Trump prioritized deregulation and tax cuts, Harris planned partial counterfinancing through tax increases. In the run-up to the ballot, there were long concerns about a close election outcome that could not guarantee a smooth transition of power. The markets finally welcomed the clarity of a clear election result, which caused prices to rise further from November 6, as business-friendly impulses are now expected for the largest economy. The lessons from 2024 are clear: Only through differentiated thinking and a broad view can attractive returns be achieved in the long term. In 2025, it is still important to seize the opportunities offered by capital markets with courage, discipline and a global focus. An intact disinflation trend that leaves central banks opportunities for a stimulating interest rate policy and a convincing profit development at a variety of well-positioned company addresses characterize the big picture. We describe how we specifically evaluate the individual asset classes below:
global economy
The year 2024 was marked by significant divergence in global economic developments. While the US economy proved resilient, Europe and China came under increasing pressure. The USA benefited from strong labor market developments and rising productivity gains. Despite the restrictive monetary policy, economic growth remained robust and inflation gradually moved closer to the target level. This stability was supported in particular by innovative strength and business-friendly policies in the USA. In Europe, on the other hand, there were structural weaknesses. Energy crises, low productivity growth and stagnating exports slowed the economy. Germany, as the largest economy in the Eurozone, was hit particularly hard by geopolitical tensions and declining demand from China. The European Central Bank (ECB) was forced to intensify the interest-rate cut cycle in order to mitigate the economic slowdown. However, these measures provided only limited impetus as there was a lack of structural reforms. China continued to face significant challenges. The real estate sector remains an Achilles heel of the national economy. Despite extensive government stimulus measures and monetary policy easing, economic growth was unable to develop the hoped-for momentum. Weak consumer confidence and structural problems prevented stronger momentum.
For 2025, we expect positive economic growth, albeit at a slower pace than in 2024, but we expect significant regional differences. The US economy is likely to further expand its lead. Tax cuts, deregulation, and continued investment in technology strengthen competitiveness. At the same time, protectionist measures, such as new tariffs, pose risks to inflation and global trade. Growth prospects in Europe remain below average. The ECB is expected to cut interest rates further to support the economy. But without far-reaching structural reforms, this will only have limited effect. Germany could even remain in recession, particularly if the protectionist stance of the USA puts an additional burden on export-oriented industry. In China, government measures will stabilize growth, but the recovery remains fragile. The structural problems of the real estate sector and weak consumer confidence act as brake factors. More sustainable reforms are needed to ensure long-term momentum. In the long term, geopolitical tensions and protectionist trade policies will shape market conditions worldwide, particularly in emerging countries. It will be crucial for investors to focus on diversification and targeted use of regional opportunities (e.g. US companies that rapidly monetize AI, globally oriented companies from Europe, selected Asian stocks), while managing risks through selective allocation.
Monetary Policy and Bond Markets
Global monetary policy was once again at the center of investors' attention in 2024. Decisions made by central banks — often even their comments — moved billions of dollars and had a lasting impact on the markets. An exemplary example was August 5, when considerations by the Japanese central bank combined with current US economic data temporarily caused global market distortions before the situation stabilized a few days later. This event once again illustrated the close interconnection of global financial markets and the decisive role of carry trades in this system.
Overall, 2024 was the year of interest rate cuts, albeit at an unexpected rate. The Federal Reserve (Fed) reduced interest rates in two steps, while the European Central Bank (ECB) cut interest rates in total three. Interestingly enough, the ECB cut in June and thus ahead of the Fed, a historically unusual move. At the beginning of the year, interest rate cuts in the USA were still expected to be six to seven. In fact, however, the first reduction only took place in September, after inflation remained stubborn, contrary to expectations. In the meantime, additional interest rate hikes have even been discussed in the summer. The USA thus reached the preliminary interest rate point in 2024 before the Fed changed course. The first interest rate cuts were made possible by a fall in core inflation, robust economic growth, and surprisingly strong increases in labor productivity and a growing supply of labor. In Europe, on the other hand, the ECB was faced with the challenge of balancing a weakening economy with falling inflation rates. The development of the two European heavyweights Germany and France, which are each struggling with domestic political problems, remains important. The focus is in particular on yield development. While the yield on the 10-year Bunds fell from around 2.65% p.a. to just over 2% since the first interest rate cut in the summer, comparable French government bonds yield significantly higher at almost 3% p.a. The picture was mixed in emerging markets. High US interest rates and a strong dollar weighed on capital flows, while China tried to stabilize the economy with government stimulus measures and an expansive monetary policy. But despite these efforts, structural challenges remain significant in the Middle Kingdom, particularly in the real estate sector.
A differentiated picture emerges for 2025. The Fed is likely to continue its cycle of interest rate cuts, but with caution to counteract a renewed rise in inflation. Demand for US bonds remains high due to attractive returns along the entire flat yield curve, with yields of around 4% in 2025. In Europe, the ECB is likely to (must) lower interest rates further to support the economy. Our forecasts assume that key interest rates in the euro area could fall to around 1.75%. This could give European bonds a more attractive risk/reward profile than American bonds, even though we do not aim to extend the duration. Emerging market bonds remain demanding due to geopolitical uncertainties and protectionist US trade policies. In our opinion, selective allocations through active fund management are essential here. Investors should prepare for an environment of moderate interest rate cuts but ongoing geopolitical and economic uncertainty. Diversification remains the key to making optimal use of opportunities in different regions and maturities and minimizing potential risks. We continue to focus on quality (e.g. high-credit corporate bonds, Pfandbriefe and government bonds from Europe). We favor the mid-term segment, which, in our opinion, offers the most interesting risk/reward ratio. Due to the upcoming interest rate cuts in the EUR area, short-term investments such as overnight or fixed-term deposits offer no alternative, as the reinvestment risk increases over the next few months as interest rate cuts take place.
Equity markets
Global equity markets were remarkably resilient in 2024 and achieved pleasing returns despite numerous challenges. The S&P 500 is expected to record an increase of over 25% for the second year in a row — an exceptional event that has only been achieved three times so far in the index's more than 100-year history. But index levels only tell half the story. Behind the impressive figures is a growing divergence between winning and losing stocks. An example: While Nvidia was one of the most successful titles of the year, Intel was massively disappointing even though both companies should benefit from the AI momentum. This polarization was also evident in the DAX, which was above 20,000 points for the first time. However, only nine out of 40 stocks reached new all-time highs, with index gains being driven primarily by a few high-capitalized companies. The positive development of the equity market was supported by a strong US economy and stabilizing inflation dynamics. In particular, AI technology companies and industrial stocks that benefit from digitalization, as well as selected pharmaceutical and energy stocks, contributed to performance. In Europe, developments were more moderate, as political uncertainties, structural weaknesses and geopolitical tensions weighed on sentiment. However, globally positioned companies with innovative strength and a diversified positioning were able to benefit. On the other hand, companies that were heavily focused on the European market or on politically dependent sectors had to accept double-digit share price losses in some cases.
The picture was mixed in emerging markets. While India and South Africa, for example, benefited from rising commodity prices and local demand, Brazil and Mexico, for example, had to contend with the burdens of a strong US dollar and high US interest rates. China failed to meet growth expectations despite government stimulus measures and continues to struggle with deflationary developments that cannot be resolved through monetary policy easing alone. However, recent more decisive communication from the government gives hope for more effective measures, which was reflected in a recovery in Chinese equity markets.
Regional differentiations are expected to continue in 2025. Despite high valuations, the USA remains the preferred investment region, supported by solid fundamentals and a business-friendly government stance. Technology and utility stocks are likely to continue to benefit from AI and digitalization. However, there is a risk that many investors are now investing quite one-sidedly, that we recognize historically high levels of optimism and that not all companies will grow into the higher valuations. We see almost no risk premium over bonds anymore. As a result, the stock market will also have to look at bond markets, particularly if debt-based stimulus measures by the new government influence returns and thus pose a challenge for equity markets. Europe could benefit from valuation reductions compared to the USA. ECB interest rate cuts could offer selective growth opportunities, particularly for innovative and globally active companies. Nonetheless, the region remains vulnerable to geopolitical tensions and weak demand from China. Political stability in core countries such as Germany and France as well as progress in conflict resolution in Eastern Europe are crucial to strengthening market confidence. In emerging markets, challenges remain significant, particularly as a result of protectionist US trade policy and geopolitical uncertainties. Yet regions such as Asia and Latin America offer selective opportunities if political stability and capital flows are maintained.
currencies
In 2024, the foreign exchange market was characterized by the different economic dynamics of the major economies. The US dollar was robust, supported by the strong US economy and positive real interest rates. Despite the first interest rate cuts in autumn, the dollar maintained its strength against most currencies. This is also due to the attractiveness of US dollar investments as a “safe haven” in an uncertain global environment. The euro, on the other hand, weakened by the subdued economy in the Eurozone and the ECB's limited room for manoeuvre. Economic stagnation in Germany and fiscal challenges in France created pressure as well as geopolitical tensions. These factors prevented the single currency from recovering. In Asia, the Chinese yuan remained weak against the US dollar. China's below-expected economic dynamism and ongoing problems in the real estate sector contributed significantly to this development. Geopolitically, we are witnessing a new bloc formation. G7 on one side, the so-called BRICS on the other. In this context, there has also been speculation about the BRICS's own common currency, but its practical implementation remains questionable due to a lack of homogeneity within the group. The latest comments from Donald Trump, who rejected such plans and brought potential tariffs into play as a countermeasure, illustrate the complexity of this development.
In 2025, we expect differentiation on the currency market to continue. The US dollar is likely to lose slightly in value as a result of a moderate Fed interest rate cut cycle. Yet it remains a preferred reserve currency thanks to the strong fundamentals of the US economy and political stability. However, should geopolitical risks increase or inflation flares up again, the dollar could regain strength in the short term.
The euro has the potential to stabilize, provided that the ECB continues its expansionary monetary policy to boost growth. In the medium term, targeted economic policy measures to support the European economy could further strengthen the euro. However, trade conflicts and geopolitical tensions remain challenges that could limit a sustained upward trend in the euro and could also build up temporary pressure as interest rate differentials against the US dollar increase. In Asia, the Chinese yuan could benefit from government stimulus measures, but structural weaknesses in China's economy, particularly in the real estate sector, remain a risk. Overall, however, volatility should increase, particularly in the case of currencies, as it is the new US president's very own wish to tend to weaken the US dollar in order to help the domestic economy. However, the USA is currently more or less the only region that is bursting with strength and is still being further stimulated. Growth then simply attracts new capital, which also speaks for the currency.
feedstocks
The year 2024 was characterized by significant volatility on the commodity markets. Geopolitical tensions, in particular the ongoing conflict in Ukraine, strategic rivalries between the USA and China, escalations in the Middle East and uncertainty over the sea route through the Red Sea, had a significant impact on energy prices. Crude oil was caught between geopolitically caused supply bottlenecks and weakening global demand, particularly from Europe and China. Over the year, price movements remained moderate, with a significant decline from the annual highs starting in summer. This development was due in no small part to the announcements of the new US President, who is aiming for a significant expansion of oil production. The precious metals sector also showed significant movements. Gold benefited from ongoing uncertainty and the search for safe havens, supported by the global debt problem and the limited leeway of central banks. In the industrial metals sector, sentiment remained subdued. The weak economic recovery in China, paired with high inventories, put pressure on prices. Copper, a key indicator of global growth, remained under pressure due to weak demand and high inventories and showed seasonal patterns similar to oil prices.
For 2025, we expect commodity markets to recover, supported by a normalization of the global economy and stronger demand. Crude oil is likely to benefit from a gradual stabilization of the Asian economy. A possible easing of Chinese economic policy could strengthen consumer confidence and further stimulate demand for raw materials. However, geopolitical risks, such as further tensions in the Middle East, remain potential price drivers. We continue to regard gold as an attractive asset, particularly in an environment of moderate interest rate cuts and possible currency depreciations. Geopolitical uncertainties and trade conflicts could further support demand for safe investments. In the industrial metals sector, copper, cobalt, lithium and nickel in particular are likely to emerge as the winners of a global economic recovery and the progressive transition to green technologies. The growing demand for materials for expanding renewable energy and electric mobility will further increase the importance of strategic metals.
portfolio structure
For 2025, we recommend a balanced and diversified portfolio structure that is equally focused on stability and growth opportunities. In an environment of geopolitical uncertainty and differentiated market developments, careful allocation remains crucial in order to benefit from both regional and sectoral trends and to effectively minimize risks. Our approach prioritizes a combination of global quality stocks, short to medium-term bonds with investment grade credit ratings, higher-yielding emerging market bonds, gold as a hedge, and temporary liquidity. We continue to believe that a consistently high investment ratio makes sense in order to exploit long-term return potential. US equities remain the core part of our strategy. The strength of the US economy, supported by tax incentives, deregulation and technological progress, provides a solid foundation. Companies that can quickly integrate and monetize innovations into their business models are particularly attractive. In doing so, we pay particular attention to high margins, which act as a hedge against economic downturns. This key figure is a decisive criterion in our selective selection, away from pure index levels. European equities still require a special assessment of the extent to which their business models are negatively affected by political frameworks. Small and midcap companies should promise further potential, particularly as they are still underweight in many custody accounts. We had already addressed this fact last year, even before expecting falling interest rates, and accordingly allocated it early on as a successful addition.
Emerging markets, on the other hand, should be weighted with caution, as they suffer from a strong US dollar and high interest rates. Nonetheless, specific regions in Asia, even outside of China, could benefit from structural reforms and digitization in the long term. We have therefore allocated emerging markets, although we are currently slightly underweighted.
In the area of fixed-income investments, we see better opportunities in Europe than in the USA, in contrast to equities. In Europe, creditworthiness government and corporate bonds offer attractive returns in the current interest rate environment, particularly if the ECB's interest rate cuts continue as forecast. Emerging market bonds remain an attractive addition for us due to their higher returns and improved liquidity. Gold remains an essential part of our portfolio strategy. In an environment of geopolitical uncertainty and expansive monetary policy, it serves as a reliable hedge. A moderate or temporary liquidity balance can be useful in order to be able to react flexibly to new opportunities in volatile market phases. Last year's events have shown that highly concentrated indices can deliver exceptional returns. However, broadly diversified portfolios ensure long-term stability and minimize fluctuations. Our focus is on a stable balance between growth and security, which can be dynamically adapted to changing market conditions in order to both make better use of opportunities and to minimize risks more quickly.
Our strategy remains independent of daily market activity, as we consistently focus on the quality of the individual companies. The positive relationship between investment returns and long-term price behavior strengthens our conviction that quality will prevail even in volatile times. In this way, we ensure that our portfolio remains stable over the long term and generates sustainable returns.
