Insights

Theme 1 – Global Economy: Balancing Growth and Policy Shifts

Global economic growth is projected to soften modestly in 2025, with the IMF expecting an expansion of 3.2% [1]. This moderation reflects rising uncertainties and the impact of U.S. tariff and immigration policies, which are beginning to weigh on activity.

It appears that, inflation, while continuing to normalize, is no longer the pressing concern it once was for policymakers and investors. However, progress on this front is expected to slow and may vary significantly across regions.

In the U.S., Morgan Stanley forecasts a GDP expansion of 2.1% for 2025. However, they project that growth will decelerate to 1.6% in 2026 [2], falling below the economy’s potential. According to them, this expected slowdown can be attributed to the new administration’s hawkish trade policies, including tariffs on imports, which are anticipated to push consumer prices higher. Further, as per Morgan Stanley’s forecasts, late 2025 may see a surge in inflation, which is likely to suppress consumer spending, production, and employment as the year progresses. Additionally, expected immigration restrictions could negate the advantages of labour supply growth, potentially intensifying inflationary pressures and further curbing economic expansion.

Morgan Stanley also expects Europe’s growth to stabilize around 1%, but ongoing global trade disruptions could hinder its trajectory. Similarly, China faces significant challenges, as deflationary pressures persist. The country’s overinvested manufacturing sector remains vulnerable to tariffs, while consumption and fiscal stimulus measures are unlikely to fully offset these headwinds.

Meanwhile, Japan continues to break away from its long deflationary spell. Wage inflation is now an established trend, and overall inflation is expected to hover around 2%², signalling a more stable economic environment.

Across the globe, the interplay between trade policies, inflationary trends, and regional dynamics will be pivotal in shaping the economic landscape in 2025. Morgan Stanley expects trade policies such as tariffs could create ripple effects across global supply chains, altering production costs and consumer behaviours in various regions. Meanwhile, varying inflationary trends and differing regional growth trajectories will test the resilience of economies, highlighting the need for adaptable monetary and fiscal policies to mitigate emerging risks and sustain growth.

Theme 2 – Geopolitics Shaping the Economic Backdrop

The evolving geopolitical landscape continues to profoundly influence the global economy, with the U.S.-China rivalry at its centre. This persistent rivalry has extended beyond trade tariffs into critical areas such as technology and semiconductors. U.S. restrictions on Chinese exports, including electric vehicles (EVs), and sanctions on advanced technologies are causing significant disruptions to global supply chains. As the incoming Trump administration is expected to introduce additional protectionist measures, the resulting trade barriers and regulatory uncertainties are expected to intensify.

 In Europe, the ongoing war in Ukraine continues to disrupt energy markets, driving up costs and raising concerns about supply security. Efforts to transition to cleaner energy sources remain a priority, but Europe’s dependence on imported raw materials leaves it vulnerable to geopolitical risks. Simultaneously, increased defence spending, necessitated by the conflict, is straining fiscal budgets, limiting resources available for broader economic recovery initiatives.

 In the Middle East, tensions in the Strait of Hormuz—a crucial chokepoint for global oil supplies—remain a significant risk to energy markets. Any escalation in the region could lead to sharp price spikes, exacerbating inflationary pressures worldwide.

 China, meanwhile, is strategically pivoting to strengthen its economic resilience. By bolstering ties with Southeast Asia through regional trade agreements and investments, China is diversifying its trade partnerships and reducing its reliance on Western economies.  As exports to the U.S. have declined to just 15% of China’s total exports, the remaining 85% will be important for determining the trade outlook (see Figure 2).

We are of the opinion that amid these geopolitical challenges, new opportunities are emerging. The “China Plus One” strategy is expected to continue to redirect investment into emerging markets such as India, Vietnam, and Indonesia, reinforcing their positions within global supply chains [3]. Considering these facts, we are of the view that for investors, domestic-oriented sectors in emerging markets with robust fundamentals may offer a measure of stability, as they are less exposed to external shocks.

Theme 3 – The Mighty Greenback: USD Resilience Amid Global Shifts

The US dollar (USD) is expected to remain strong in 2025, buoyed by several key factors that have carried momentum from late 2024. In the final quarter of 2024, the USD was well-supported by unexpectedly strong US economic data, and a hawkish Dec 18 rate cut where Powell described the decision as a “closer call” [5], downplaying the need for more rates cuts from the FED. Along with the decision to cut rates, the FOMC also released its latest Summary of Economic Projections (SEP). The projections showed the median rate moving up from 3.4% to 3.9% for 2025 [6], implying that the FOMC members now expect only two additional 25bps rate cuts over the next twelve months instead of four additional 25bps rate cuts, previously.

Additionally, the post-election reaction contributed to positive sentiment, reflecting the typical features of the so called “Trump trade,” where a strong USD is often observed. However, the exception for the USD could be against the JPY, where BOJ is expected to normalise rates after years of deflationary pressure subsiding even as they voted 8-1 to keep rates unchanged in Dec ‘24 [7].

As we look ahead, the USD’s performance will likely be shaped by three critical factors: the direction of US yields vis-a-vis against the major G10 counterparties, economic momentum, and global risk sentiment. With expectations of gradual declines in global policy rates (see Figure 4), the USD remains one of the higher-yielding currencies compared to other major currencies (see Table 2). This should hold true even after factoring in the two expected Fed rate cuts in 2025 (down from four) as the Fed could put a premature end to its easing cycle.

The US economy’s continued outperformance relative to global peers is another key source of strength:

Moreover, lingering uncertainties in an increasingly multi-polar world, exacerbated by tariff policies and geopolitical tensions, shall reinforce the USD’s role as a safe-haven currency. These dynamics are expected to sustain the dollar’s upward trajectory, even as the broader market navigates shifts in risk appetite.

Emerging market currencies, however, may face a challenging outlook. The Chinese yuan is expected to struggle amid slower economic growth and geopolitical tensions, with other Asian currencies are likely to follow and a well-documented preference to ease further to prop up the ailing economy. In contrast, the Singapore dollar is predicted to outperform its emerging market peers, supported by strong economic fundamentals [9] and a proactive monetary policy stance.

European currencies, including the euro and the British pound, are likely to remain weak. The combination of sluggish economic growth, ongoing political uncertainties, and monetary policy divergence with the US will continue to weigh on these currencies. Meanwhile, in the safe-haven space, although the Swiss franc is expected to be favoured over the Japanese yen due to its stability, the Swiss National Bank seems likely to cut rates further. As the economy falters with threats, they may reintroduce negative interest rates if necessary [10]. Based on this, we believe that the Swiss franc remains to be a strong candidate for a carried currency play, given its stability and appeal in a low-risk context.

In the commodities space, we do not expect gold to replicate its exceptional 30% year-on-year return seen in previous years. Instead, it is likely to trade within a 200–300-point range as market conditions stabilize. While gold retains its status as a hedge against inflation, reduced monetary policy surprises and a steadier inflation outlook may limit significant price movements.

Theme 4 – Fixed income: Navigating Opportunities in a Softer Rate Environment

The fixed income outlook for 2025 is promising, driven by moderating inflation and the shift toward easing monetary policies across major economies. The US Federal Reserve is expected to cut its policy rate to 3.75-4%, while the European Central Bank is expected to lower its policy rate to a terminal rate of 1.75% [11]. This environment of declining interest rates presents a notable opportunity for bond investors. Importantly, a decrease in interest rates would create a proportionately larger upside for bond prices compared to the downside that would result from a similarly sized rate increase. This asymmetry, coupled with a low-growth environment, sets the stage for strong performance in fixed income markets, particularly investment-grade corporate bonds.

Investment-grade (“IG”) bonds may stand out as the preferred option for 2025, offering attractive yields relative to government bonds. Beyond their income potential, IG bonds may provide an additional opportunity for price appreciation as rates are expected to decline, amplifying their total return potential. These bonds also offer the safety and stability of high credit quality, making them particularly appealing in an environment of slower economic growth.

In contrast, high-yield bonds may present a less compelling case. Currently, high-yield spreads remain tight, meaning investors are receiving limited additional return for the elevated credit risk they are taking. Historically, tight spreads have often been associated with lower compensation for risk, reducing the risk-adjusted appeal of high-yield bonds. In such an environment, investment-grade bonds may represent a safer and more rewarding alternative, offering a superior balance of risk and return.

Meanwhile, emerging market debt, particularly in hard currencies, may present compelling opportunities for yield-seeking investors. Selective investments in these markets, focusing on sovereign and corporate bonds in sectors like energy and technology, can provide a balance of risk and return in a diversified fixed-income portfolio. Collectively, these segments are expected to make fixed income an essential component of a well-rounded investment strategy for 2025.

Theme 5 – China’s Falling Bond Yields: A Catalyst for Dividend-Yielding Equities?

China’s 10-year government bond yield recently fell below 2% for the first time on record (see Figure 7), underscoring the mounting challenges facing the world’s second-largest economy. This decline reflects growing investor bets that Beijing will need to adopt further monetary easing measures to revive faltering growth. Despite a series of stimulus packages and rate cuts, the economy remains plagued by uneven recovery, with pockets of resilience in retail sales overshadowed by a prolonged property market downturn. The yuan has also weakened amid a widening yield gap between Chinese debt and similar-maturity U.S. Treasury notes, exacerbating market concerns.

The drop in bond yields, now at 1.735% (as of 17 Dec 2024), marks a sharp decline of 89.7 basis points for the year, positioning 2024 as the steepest annual decline since 2018. Analysts widely expect this trend to continue, with a few security houses predicting a cut in the reserve requirement ratio (RRR) for banks in the coming year [13].

As China’s bond yields continue their downward trajectory, institutional investors will have to think of other investment options for their funds.  This shift may create opportunities in equities, particularly in stable, dividend-yielding stocks that align with their requirements.

Theme 6 – AI’s Growth Potential: Real Value, Tangible Returns, and Room to Rise

Over the past two years, artificial intelligence (AI) has emerged as a dominant force in reshaping industries, revolutionizing the way we work, interact, and engage with the global economy. This unprecedented momentum has naturally sparked comparisons to the dot-com bubble of the late 1990s, where excessive hype and investor exuberance led to the collapse of risky, unproven startups and wiped-out trillions in market value [14].

Sceptics today argue that the AI boom mirrors that period of irrational exuberance. Companies like Pets.com once saw their valuations soar far beyond their actual business potential, only to face harsh corrections as the bubble burst. However, a closer look reveals critical differences that may make today’s AI-driven rally far more sustainable and compelling for investors [15].

First, the current excitement surrounding generative AI has been tempered with a healthy degree of scepticism. Investors, while enthusiastic, are more discerning about AI’s tangible value and real-world applications. Companies in AI hardware and software, especially industry leaders like Nvidia and Microsoft, are not just attracting speculative capital—they are already delivering concrete results [16]. For instance, AI software is driving meaningful profit growth for companies, something that didn’t materialize for many internet startups during the dot-com era. This point is underscored by a notable distinction between stock rallies for AI hardware and software companies. While the share prices for a handful of companies, especially Microsoft, have gotten big boosts from AI, that’s because AI software boosted their profits — unlike the websites of the dot-com boom. Importantly, these companies’ valuations—such as price-to-earnings (P/E) and free-cash-flow ratios—remain within historical ranges, signalling that investor expectations are grounded rather than unchecked speculation.

Figure 8 and 9 below further highlights why fears of overvaluation may be overstated. While the forward P/E ratio for the S&P 500 Information Technology sector has risen to 29.1 (as of December 16), it remains far from the unsustainable heights of the dot-com bubble, when valuations soared well above 50. In fact, compared to the broader S&P 500, whose forward P/E is 22.4, technology stocks are not excessively priced given their growth potential. These levels may suggest room for further upside as the transformative potential of AI continues to unfold over the coming years. Similarly, the P/E ratio for tech giant Nvidia is near the historical average and nowhere near its peak. This may suggest room for further upside as well.

Unlike the speculative websites of the early internet era, we feel that AI today is driving tangible, scalable solutions with clear economic value. From enhancing productivity to reshaping supply chains and boosting enterprise efficiency, generative AI is a structural growth story—not just a short-term hype cycle [18]. While it’s prudent to remain watchful for excesses, the fundamentals underpinning AI’s growth make it a far more attractive investment opportunity than the dot-com bubble ever was.

Theme 7 – Private Markets: Positioned for Growth Amid Shifting Economic Winds

Private markets are poised to deliver attractive investment opportunities as decelerating global economic growth converges with expectations of further interest rate cuts. Easing monetary policies and moderating inflation are expected to lower the cost of capital, creating a favourable environment for deal flow and capital deployment across private equity, private credit, and venture capital [19].

While fundraising and deal activity faced headwinds in the past year, private markets have remained resilient. Large buyout funds with strong track records continue to attract substantial capital, while lower and mid-market segments offer reasonable valuations and diverse exit opportunities. Additionally, private credit returns have remained steady in 2024, offering stability amidst the volatility of public markets [20].

The share of private markets within the global financial system continues to expand, with assets under management (AUM) projected to grow exponentially [21].

This growth is underpinned by a rebound in financing supply and a resurgence in M&A activity. In 2024, narrowing bid-ask spreads facilitated a significant recovery, driving M&A deal value up 27% year-to-date. Improved valuation clarity and lower financing costs have enabled both strategic buyers and financial sponsors to act with confidence. Looking ahead, further interest rate cuts expected in 2025 could sustain this momentum, driving robust deal activity across sectors and geographies.

Regionally, Europe has emerged as a bright spot, with fundraising hitting multi-year highs supported by attractive valuations and monetary policy tailwinds. In the US, private equity managers are identifying pockets of opportunity in energy transition, supply chain reshoring, and emerging technologies like AI. These long-term structural trends are likely to drive significant private capital flows, further emphasizing the role of private markets in addressing global challenges.

For investors, the combination of declining borrowing costs, increasing confidence in deal-making, and resilient private credit performance may make private markets a promising area for growth. As governments face fiscal constraints, private equity may remain well-positioned to deliver the capital and solutions needed to drive real progress toward long-term goals.

Source: 

[1] IMF – Forecasts 2024-2029
[2] 2025 Global Economic Outlook: U.S. Policies May Temper Global Growth | Morgan Stanley
[3] Asia to drive global growth as ‘China plus one’ pivot gains momentum amid Trump’s return | SCMP
[4] The Rise of the China Plus One Strategy | Northern Trust
[5] Key takeaways from the Fed’s third rate cut | CNN
[6] Fed median projection for end 2025 Federal funds rate rises to 3.9% | Nasdaq
[7] BOJ keeps rates steady by 8-1 vote, board member Tamura dissents | CNA
[8] Interest Rate – Countries – List | TradingEconomics
[9] Singapore – An Economic Powerhouse | EDB
[10] Swiss National Bank chief flags negative rates, weakens Swiss franc | Reuters
[11] The global economy is forecast to grow solidly in 2025 despite trade uncertainty | Goldman Sachs
[12] 2025 Outlook: We have seen this movie before | Capital Group
[13] China’s 10-year bond yield slumps to record low as investors scramble for safe haven | SCMP
[14] AI Hype vs. Dot-Com Bubble: A Reality Check
[15] How the AI boom differs from the dotcom bubble – Professional Planner
[16] Nvidia’s revenue nearly doubles as AI chip demand remains strong
[17] Prediction: This Will Be The Best-Performing Stock In The $1 Trillion Club In 2025
[18] Gen AI in production
[19] The City’s top bankers see private equity fuelling 2025 deal boom
[20] Q2 2024 US PE Breakdown | PitchBook News
[21] 2025 Investment Outlook | BlackRock Investment Institute
[22] BII Global outlook