Canada Life Asset Management fund managers consider the themes that are set to shape 2025 and how they will look to respond to them.
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Multi-Asset
UK Equities
Fixed Income
Liquidity
Global Equities
David Marchant, Chief Investment Officer, The Canada Life Assurance Company; Managing Director, Canada Life Asset Management
Following a strong year for equity markets in 2024, we remain positive for the year ahead, with stable growth and inflation at last under control. However, there appears to be more uncertainty as to the outlook than we saw last year. On the one hand a Donald Trump presidency offers the prospect of a smaller state, lower taxes and deregulation, all good for equity markets. However, the threat of tariffs, more government debt and a tighter labour market due to reduced immigration offer a contrasting threat. In the UK, similarly, the promise of a removal of the obstacles to growth by the new Labour government is an exciting message for markets. Against that, increased government spending and higher taxes on labour have the potential to choke off the recovery we have seen in 2024.
Add on the ongoing threat of the wars in the Middle East and Ukraine and we enter 2025 expecting a bumpy ride. Positively, elections are largely behind us and bond markets offer higher yields than we have experienced in recent years. Meanwhile, equities can continue to rise if economic growth can be maintained and inflation controlled, particularly outside the United States where equity markets remain cheap by historical standards. Diversification, as ever, will be important as we navigate the arrival of ‘unknown unknowns’ but one thing is certain: it will be a fascinating 2025.
Jordan Sriharan, Senior Fund Manager, Multi-Asset
“We're cautious in the short-term of being overweight areas of the market that have demonstrated high levels of price momentum for quite some time now.”
The multi-asset team is constructive on prospects for the economic cycle for 2025. Two data points underpin that constructiveness: low unemployment and strong GDP growth. This rare combination is usually a catalyst for earnings growth that helps equity markets and in turn credit markets as it allows corporates to maintain stable cash flows and, consequently, their credit rating. This is a global phenomenon but more obvious in the US, as a global driver of economic demand.
Therefore, as we think about our asset allocation into next year, we're positive in the medium-term on the global economy. However, we're cautious in the short-term of being overweight areas of the market that have demonstrated high levels of price momentum for quite some time now, particularly in the last half of this year. We are also mindful of the traditional post-Presidential inauguration slump in equity markets, which would offer the opportunity to buy back in at a more attractive valuation.
Our equity positioning is framed within the context of momentum versus value and what constitutes expensive valuations and cheaper value ideas; in our view, when it comes to equity markets, the US is widely considered to be more expensively valued, whilst Europe, the UK, emerging markets, Asia, and Japan look more attractively valued. However, we consider both US productivity gains and corporate earnings growth to be well ahead of the long run average, with no fundamental reason for that to change, and for this reason we remain bullish on US equities.
Elsewhere, government bonds and investment grade credit are likely to continue to form an important defensive part of our portfolios. These assets are now working more effectively as a diversifier – when bond markets have sold off in recent times, yields have come down – and investors are now buying bonds as an offset in risk-off moments. In contrast to previous rate-cutting cycles, corporate balance sheets are robust, based on long-term metrics; corporates’ internally-generated cash flows are covering their dividend payouts and capex in aggregate, and as a result the companies don’t need to issue as much debt in 2025.
Stuart Taylor, Senior Fund Manager, UK Equities
“Companies will probably try and recoup some of the tax increases in their profit margins…which [could ultimately] represent a squeeze on discretionary income.”
The October Budget arguably doesn’t meet Labour’s stated ‘growth’ objective where small and mid-sized UK businesses – the lifeblood of the economy – are concerned. This has the potential to reverse the improvement in discretionary income that has been apparent over the past year or so owing to reduced inflation and larger salary increases.
Where Labour has focused tax increases on employers, companies will probably try and recoup some of that in their profit margins. Therefore, prices are probably going to be increased more than they would have been, and salaries increased less than they may otherwise have been, both of which would represent a squeeze on discretionary income. Pay rises for the public sector, which represents around 20% of overall employment, also have the potential to be inflationary, depending on their scope.
However, for the next few months it will be difficult to assess the effect of announced changes until we can see how they actually feed into the economy. For this reason, we're not currently doing anything particularly aggressive in the UK funds. We are likely to maintain our focus on house builders, which we have been building up as rates have been coming down and the level of housing transactions has been growing.
Our themes are quite stock-specific at the moment. I’ve been recycling capital from positions that have performed well into some that haven’t done as well. For example, I've trimmed exposure to Unilever, which has experienced strong growth this year, and swapped the capital into Reckitt Benckiser. However, we’ve continued to hold other strong performers, such as Barclays, that we believe have further to run. Our base case is that there are good companies in the UK with potential to recover well next year if we just get a little bit of stability.
David Arnaud, Senior Fund Manager, Fixed Income
“An unintended effect of [Trump’s policies] is likely to be a revival of inflation, which may well force the Fed towards fewer rate cuts than it might otherwise have intended.”
The main theme we see for 2025 is the growing divergence between Europe and the US on the back of Donald Trump’s second term in the White House, which will be a key driving force for fixed income markets. Trump’s policies will most likely involve a combination of higher fiscal spending, deregulation and protectionism in the form of trade tariffs, as well as a curb on immigration, all aimed at boosting the US economy, in the short term at least. An unintended effect of these is likely to be a revival of inflation, which may well force the Federal Reserve (Fed) towards fewer rate cuts than it might otherwise have intended. These policies are likely only to come into effect from the second half of 2025, indicating that volatility will prevail during the first half of the year.
For Europe, a Trump presidency will most likely tame growth as trade tariffs act as a drag on European exports to the US. Meanwhile, where China is forced to reduce exports to the US owing to protectionism, it might try to increase its market share in Europe, meaning more competition for European companies. These factors are likely to exacerbate the manufacturing recession already confronting Europe. For the UK, there is a very similar story to the one at play in Europe, except that the chance of a recession is less pronounced here as UK growth is less dependent than that of the Eurozone on US exports.
In terms of where we see pockets of value for 2025, we believe that the financial sector will offer good opportunities and, in the US, the corporate sector. US banks are likely to benefit from deregulation, while European banks are also in a good position to weather the pressures facing the corporate world in the region.
We generally favour duration and short government bonds in Europe and in the UK, as we anticipate rates being cut by both central banks. In the US, we are more neutral on duration because of the inflationary nature of policies that Trump has pledged to implement, and the likelihood that this will deter the Fed from making additional rate cuts.
Steve Matthews, Fund Manager, Liquidity
“We expect the Bank of England to continue to make rate cuts on a steady basis… which would mean hitting neutral rates during the second half of 2025.”
The Bank of England (BoE) has been fairly clear that it doesn’t believe that inflation will stay consistently at or below the 2% target next year. Although investors perhaps anticipated swift rate cuts to stimulate the economy, mirroring the path of rate hikes, current data and the potential for tariff-fuelled inflation following Donald Trump’s inauguration in January mean that this isn’t likely to be the case.
It is a difficult balance for the BoE to strike because the UK economy is sluggish, but simultaneously there is relatively low unemployment and high wage data. We would expect the Bank to continue to make rate cuts on a steady basis; probably three to four cuts on a quarterly basis beginning in February, which would mean hitting neutral rates during the second half of 2025.
We will position the funds on that basis as we enter 2025, looking for opportunities to buy yield while also staying true to our normal process of being oversupplied of overnight liquidity. We will look to continue to add floating rate notes (FRNs), where there are currently some attractive opportunities. Although yields will go down as rates are cut, at the moment we're buying FRNs at 30 to 50 basis points above SONIA, giving a spread above the benchmark for the life of the bond, as well as capital security and additional liquidity.
We're also looking to maintain – and increase where possible – our sovereign, supranational and agency (SSA) exposure. Other than that, we will continue to look for opportunities to diversify and add exposure to new entrants to the market where we believe that additional value is available.
We still have the prospect of additional regulation, in the form of the FCA’s ongoing liquidity management review. In the meantime, we will be maintaining elevated levels of overnight and weekly liquidity. It is worth noting that this provision of additional liquidity has enabled us to take advantage of some pricing anomalies in the past few months.
Bimal Patel, Senior Fund Manager, Global Equities
“While we are positive on equities on a long-term basis…we are concerned that there is little room ahead for earnings expansion in the US.”
Global equities have had yet another strong year of returns in 2024, driven by stellar performance from utilities and financials which has offset weakness in healthcare and staples. While we are positive on equities on a long-term basis, due to its ability to compound earnings, we are concerned that there is little room ahead for earnings expansion in the US, which now accounts for 73% of global markets.
Historically the high-level framework for US equities would have been 10% earnings growth plus a few points of multiple expansion on top to achieve low to mid-teens total return. For the year ahead, we expect about 13% earnings growth in the US driven by tax cuts – which are likely to flow relatively quickly to the bottom line – and an earnings recovery. Global equity earnings growth is expected to be about 10% in 2025, largely influenced by the US, with low single digits earnings growth from global developed ex-US markets.
With US markets trading on price-to-earnings (P/E) multiples in excess of 25x and global developed ex-US markets trading under 15x, there is some scope for multiples to converge via modest multiple contraction in the US, though this is likely to be offset by strong US earnings growth. There may be some opportunity for multiples in ex-US markets to expand, but a likely prerequisite would be a stronger earnings outlook in those markets.
Our macro base case is slightly more cautious on inflation compared to market expectations. We are concerned that inflation could surprise on the upside, limiting the ability of central banks to cut interest rates. Given these conditions, equities are expected to perform reasonably well, as corporate earnings adjust according to the extent to which they decide to transfer the effects of inflation to their customers.
Important information
The value of investments may fall as well as rise and investors may not get back the amount invested.
The views expressed in this document are those of the fund manager at the time of publication and should not be taken as advice, a forecast or a recommendation to buy or sell securities. These views are subject to change at any time without notice.
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Asset Management Market update webinar Q1 2025
Join us for a panel discussion with our Global Equity Fund Manager, Bimal Patel, and Global Macro Bond Fund Manager, David Arnaud, on what to expect in 2025.
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