2025 Outlook Insights

Daniel Moreno, Head of Emerging Market Debt

What are the key opportunities in your market going into 2025?

Comprising over 900 issuers across 90+ countries¹, the emerging market debt (EMD) universe is so vast that annual reflections nearly always prove that a single factor cannot drive performance across the entire region. It’s simply too vast and diversified for a homogenised approach. So, while tailwinds are accumulating across the region, dispersion levels remain high.

As active investors, we love dispersion, and we are particularly positive on the opportunity set within credit going into 2025, following positive performance through 2024. Tailwinds include steady growth, the continued normalisation of inflation, ongoing central bank easing and a significant improvement in credit-rating momentum – we’re seeing more upgrades than downgrades. And that’s set against a supportive macro backdrop and better credit momentum.

Within credit, we see the most opportunities within high yield. Interest rates are particularly influential on this sub-asset class and while we expect to see continued volatility within rates, this should be within a range, rather than extreme spikes towards either end of the scale. 

What surprises could 2025 bring?

It’s fairly easy to think of potential negative surprises for EM, and I’m sure plenty of these are well-documented. But one potential positive – and somewhat paradoxical – surprise could come from the return of Trump to the White House.

The impacts of Trump’s protectionist policies are expected to be the main risk factors for emerging markets next year. As such, the market is already discounting a lot of the expected actions to such an extent that this could ultimately create a positive surprise, where the anticipation proves to be worse than the reality. Trump likes to threaten up-front, but what he likes even more, is to cut a deal. He could intentionally be driving uncertainty to create a more favourable backdrop for dealmaking once in office. 

Additionally, China is Trump’s number-one target in terms of tariffs, with the threat of 60% looming large. But China’s exports to the US now account for only 15% of the total, while its trading activity with other emerging market economies is now higher than with the West. Because of this, trade between developing countries, or so-called “South-South” trade, now accounts for at least 50% of total activity, and is growing faster than the global average.  

¹  William Blair, May 2024

Nicolas Crémieux, Head of Convertible Bonds

What are the key opportunities in your market going into 2025?

After a steep climb to restrictive interest rates in order to curtail rapidly rising prices, most central banks all but declared victory over inflation in 2024. As we head into 2025, we anticipate a notable easing of financial conditions combined with sustained real wage growth, setting the stage for a re-acceleration of the US economy.

The election of Donald Trump, coupled with the policy momentum from a Republican sweep, represents a pivotal shift. Early policy initiatives signal pro-cyclical measures likely to provide tailwinds for the economy, especially by fostering increased capital expenditure. This environment is expected to drive continued productivity gains in the US. This seems like a good opportunity to remind that the US accounts for about 65% of the global convertible bond market by amount outstanding.

For convertibles, investor-friendly clauses in case of a M&A transaction, and a favourable issuance environment amid high-interest rates compared to the last decade, should drive robust performance and elevated issuance volumes. The convertible bond universe has been significantly renewed over the past two years, with over 200+ balanced new issues. As such, we believe it is now well-positioned to capitalise on rising share prices across various sectors globally. Notably, 45% of the convertible bond universe is made of underlying equities whose market capitalisation stands below USD5bn.

In a nutshell, we expect equity markets in 2025 to see a broad-based rally, providing a strong foundation for convertibles to outperform traditional 60/40 portfolios.

What surprises could 2025 bring?

We expect the journey towards Trump’s main policy goals to be bumpy. Market reactions to expanding deficits, shifting US tariff policies, and the trajectory of global conflicts are just a few of the uncertainties that continue to loom. Despite these risks, we anticipate 2025 will offer a constructive market environment, albeit characterised by heightened volatility and increased dispersion.

A key investment challenge will arise from the growing tension in risk assets between momentum and overvaluation. Those assets with the strongest fundamentals often exhibit the most stretched relative valuations, while undervalued assets may lack near-term momentum. Economic and policy developments in 2025 will play a critical role in determining whether momentum or valuations take precedence in driving investment returns. This complex backdrop should create an ideal market for active management and skilled stock-pickers to shine.

Equity markets outside the US offer more appealing valuations, in our view. Europe remains burdened by structural challenges and unfavourable demographics, pointing to a continued economic divergence from the US. However, we believe that fiscal initiatives to stimulate the Chinese economy could generate positive ripple effects. With several European and Chinese corporations showcasing compelling growth narratives, 2025 may bring encouraging developments for these regions, which have largely been overlooked by investors.

In summary, we are optimistic about many of the long-term secular trends emerging and see growing opportunities for investors who prioritise fundamentals.

Find out more about our high-conviction, pure-play approach to convertible bond investing.

Paul Middleton, Senior Portfolio Manager

What are the key opportunities in your market going into 2025?

As we come to the end of another very strong year for global equity markets, indicators suggest more of the same is to come, providing an opportune investment landscape for 2025.

The MSCI All-Country World Index is up over 20% as we move through December¹. The US has driven the bulk of this return, with the S&P500 Index knocking on the door of 30% returns for 2024^1. The result is price/earning (PE) levels for global equity markets are in line with Covid highs, which were significantly higher than any previous level. Valuations are stretched, especially in the US.

Market returns are therefore more dependent on earnings revisions. 10% is the typical starting place for expected earnings growth each year. For 2025, it is currently expected to be higher than this (12%), which means actual earnings growth needs to be even higher still for stocks to continue their ascent.

However, this is not true of all the market. There are some areas where the risk/reward ratio is much more attractive. On an equally weighted basis, the US market is much less expensive and earnings upside is potentially higher. This suggests we can move away from mega caps.

With post-election clarity and a stirring of animal spirits, mid-cap, domestically focused US equities look well placed, in our view, to deliver the strongest earnings revisions and should continue to drive market returns higher. It will not just be the Magnificent 7 and mega-cap names. We’ve been anticipating a broadening out for some time, and finally, many of the pieces are in place for performance to materialise across a wider market-cap spectrum – fiscal policy, monetary policy, deregulation and valuations. 

A large swathe of the US has been in recession for the last two years, for example manufacturing, freight, housing, non-residential construction, some semiconductors and consumer discretionary. At the same time, these are the areas that could benefit most from looser US fiscal and monetary policy in 2025, especially for domestic players who have less risk on tariffs.

We never look for ‘cheap’ stocks, so our focus for 2025 will be on identifying better risk/reward dynamics in high-quality companies trading at more reasonable valuations. On the non-residential construction side, for example, leading indicators have turned positive for the first time in years, which should benefit names such as Carlisle Companies and Assa Abloy, both of which are current holdings.

In the consumer sector, a big opportunity could come if we see a shift away from the “value” orientated consumer. Consumers have been feeling the pinch of inflation for years now and have altered their consumption accordingly, prioritising value products and steering clear of big-ticket or more truly discretionary items. If some of the more supportive policy measures trickle down to consumers, you might see a shift in preference away from this value focus.

We continue to have exposure to AI within our portfolios, mainly through semiconductors but also through solution providers. Valuations in this space are not demanding and growth continues to surprise to the upside.

What surprises could 2025 bring?

Maybe it’s not a true surprise, but China would be our ‘wildcard’ for next year. We expect the government to wait on further stimulus efforts until Trump is in office and further details on US tariffs are announced. Once the countermeasures are deployed and the scope of the stimulus package is clear, then we can look to get more constructive and dial in potential opportunities. We have some China exposure but are maintaining it at a low weight until we get more clarity.

A bigger wildcard would be increased political stability and more supportive, pro-growth policy in Europe, but this is unlikely to be a near-term prospect.

One other key item to watch is the market's view on how Trump policies will impact inflation. With safe hands seeming to be in control at the US Treasury, the market has reduced its focus here, but that can soon change.

¹ Bloomberg

Hywel Franklin, Head of European Equities

What are the key opportunities in your market going into 2025?

We think 2025 is going to be the year Europe’s small and mid-cap (SMID) stocks close their performance gap versus large caps. The differential between large cap and SMID is currently at one of its widest points in history, and SMIDs have a consistent track record of delivering strong bounce-backs following periods of underperformance, putting them in a great position to enter 2025, aided by rate cuts and other abating macro headwinds.

To maximise the opportunity set, we are focusing on a largely overlooked segment of Europe’s SMID universe – true small-caps, which we classify as companies with a market cap of <EUR2bn. These companies typically fly below the radar of mainstream investors.  Where the average SMID company might be covered by 10 analysts, the ones we are looking at are only covered by a handful. This information gap creates inefficiencies in the market that we aim to take advantage of.

Right now, we’re finding many companies that offer, in our view, significant upside for investors with a medium to long-term outlook. Small-caps have been shunned for several years, to the extent that we’re now seeing significant valuation support.

A name that we believe illustrates the potential of small-caps is Truecaller, which is a Swedish software business offering spam-call blocking used by >400 million users. Nuisance callers are a huge issue in countries where people predominantly use pre-pay phones. Truecaller is a household name in India – the most populus country in the world – and has a global reach, yet it flies under the radar of most investors.

After a few tough years, we are looking forward to 2025 and all it has in store for Europe’s small-caps!

What surprises could 2025 bring?

In terms of less anticipated surprises, 2025 could be the year that Europe’s exemplary yet unloved management teams reap the fruits of their labour. Investors nearly always focus on top-down performance and forget to consider the impact of management action, which can take several years to come through. European company management teams have been under pressure since the pandemic; over the last few years, they have implemented so many efficiencies and cut costs so far that they are positioned for positive performance in 2025 almost irrespective of what happens around them.

Discovering and backing amazing management teams is a big part of our investment approach, and we have seen firsthand on numerous company visits how much hard work has been going on behind the scenes at some of Europe’s lesser-known names to sculpt smart, stable and efficient businesses.

Find out more about the European small-cap opportunity here. 

Charles Walsh, Portfolio Manager

What are the key opportunities in your market going into 2025?

2025 should see accelerating global growth and a continued corporate earnings recovery in emerging market (EM) equities. Increased volatility should present the active investor with opportunities to outperform, whilst the macro environment may prove better than currently feared.

Emerging markets are positively geared to global growth. With the US and China both set to receive a boost in 2025 – the former from fiscal support and tax cuts, the latter from stimulus – we should see growth accelerating in the world's two largest economies. This is just the environment in which EM equities tend to shine. At the same time, the earnings recovery that began during 2023 in technology and has since broadened out, should continue to support EM equity returns. These earnings are underpriced versus history and would be further boosted by the recovery in global growth.

Many also fear Trump’s proposed tariffs to be inflationary. However, these concerns may be overdone if US deregulation of the energy sector leads to lower fuel and energy costs. This offset to an otherwise inflationary event may yet provide a stable backdrop for EM equities.

The safest prediction for 2025 is that with Trump stepping back to the helm in the US, we are likely to see greater volatility. EM equities is a diverse and heterogeneous asset class with risks to avoid and opportunities to profit from. With increased volatility and dispersion of returns, 2025 is likely to be a year when active investing shows its worth.

What surprises could 2025 bring?

Could Trump 2.0 be better for China than Biden 1.0?

With Biden, the fight against China is ideological. China is the enemy to be contained and constrained by any means possible. Trump is transactional, focused instead on the trade balance and a better deal for the US worker. Ironically, his return to the White House may herald a more rational approach to trade and a better working relationship between the two countries.

During Trump's first term, tariffs were implemented on certain Chinese imports due to trade imbalances between the two countries. Biden was widely expected to be softer on China but in fact, he kept Trump's tariffs and added restrictions of his own. Even in his last few weeks as President, Biden seeks to further tighten China's access to US technology, irrespective of whether it hurts the interests of the US or its allies.

If Trump 2.0 aims to bring jobs back to the US, there are many Chinese companies currently restricted from the US market (think BYD, which is subject to 100% tariffs on its EVs) that would love to build factories in the US and gain access to its consumer. The same was seen with the Japanese auto companies in the 70s and 80s. And if Trump listens to US companies, especially tech giants like Nvidia that would like to sell more into China, some of Biden’s restrictions could even be rolled back.

If Trump does follow through with harsh tariffs, China has stated its intent to unleash significant stimulus to offset any economic damage. A large dose of support in a country already investing significantly in its own domestic resilience would provide strong support for China equities. Either way, Trump 2.0 might be just what China needs for a happy new year.

Click to read Charles' latest insight 'Re-Emerging Markets'.

Daniele Scilingo, Head of Swiss Equities 

What are the key opportunities in your market going into 2025?

Swiss equities offer unique global exposure, leveraging Switzerland’s stability and focus on high-value-add niches. With only 19% of revenues sourced domestically, Swiss companies typically enjoy significant exposure to Europe (36%), the US (22%), and APAC (17%), providing a hedge against regional economic fluctuations and positioning them to capitalise on multiple recovery scenarios in 2025.

Against this backdrop, we see five major opportunities for Swiss equities going into 2025.

1. US recovery dynamics: Renewed US growth, driven by industrial resurgence, presents opportunities for Swiss exporters, especially in the healthcare and industrial sectors. Thanks to a substantial local presence in the US, stable growth in the country should bolster numerous Swiss businesses. Additionally, companies with pricing power and operational flexibility should better navigate potential tariff escalations.
2. European turnaround: A reversal of Germany’s industrial decline could boost demand for Swiss industrials and construction names that are well integrated into the European market. A more substantial commitment to Draghi’s industrial strategy for Europe, which calls on the EU to raise investment by EUR 800bn a year, would go a long way to regenerating hope and fund a revival.
3. Healthcare rebound: Beaten-down healthcare stocks with innovative pipelines and substantial brand equity offer attractive potential entry points as global healthcare spending rises.
4. Dividend stability: Steady dividend-paying Swiss equities remain attractive to income-focused investors seeking resilience against volatility.
5. Fallen angels: Companies with strong balance sheets but undervalued stock prices present compelling recovery opportunities, supported by Swiss firms’ prudent financial management.

What surprises could 2025 bring?

In terms of positive surprises, Swiss equities could benefit from both geopolitical and macroeconomic developments. Geopolitical de-escalation and Ukraine’s reconstruction would stimulate European growth and reduce supply chain disruptions, with Swiss firms that have exposure to construction and machinery benefiting disproportionately. In the US, we would expect progress on trade agreements and moderate tariffs to ease risks for Swiss exporters in industrials and luxury goods, enhancing their competitive edge.

Europe’s renewed focus on innovation and modernisation could also bolster Swiss companies in advanced manufacturing and clean technology, while M&A activity has the potential to reshape the corporate landscape. With strong currencies and cash reserves, Swiss firms could target undervalued global assets, accelerating growth and creating synergies.

Finally, in Asia, a rebound in Chinese consumer confidence could spur demand for Swiss luxury goods, pharmaceuticals and precision technology, as households spend accumulated savings.

As always, against potential upsides, we must also consider downside risks and negative surprises. Given the unpredictable interest rate and inflation environment, global currency volatility could pose significant challenges for Swiss equities in 2025. A strengthening Swiss franc might weigh on exporters, reducing their international competitiveness. At the same time, sharp movements in major currencies like the euro, US dollar and Chinese yuan could disrupt cross-border operations and profitability.

Additionally, fluctuating interest rates, influenced by divergent central bank policies, may increase the cost of capital, dampen corporate investment and impact valuations. We would expect companies with diversified revenue streams and strong pricing power to be better equipped to manage these global financial headwinds, maintaining resilience in uncertain conditions.