Four themes for 2025; navigating investment in a shifting landscape

As we enter 2025, global markets face a complex mix of challenges and opportunities. From the evolving sustainability agenda and escalating geopolitical tensions to the path of interest rates and the implications of Trump’s second term, understanding these key themes will be crucial for navigating the year ahead.

Sustainability in 2025: Pragmatism in a changing world

In 2024, sustainable investing faced familiar headwinds, many of which we have discussed previously. While challenges persist, the long-term need for sustainable solutions remains clear.

Inflation has eased over the course of the year, and we may have seen the start of a series of interest rate cuts, but sentiment and attitudes around sustainable investing continue to face some negativity. The rise of populism and the re-election of Trump might seem troublesome for the theme, however, we do see reasons to remain positive and feel the long-term drivers of performance are still there. We live on a planet with finite resources yet have a desire to grow economies and increase living standards. Weather patterns continue to exhibit extremes, and science warns of irreversible tipping points. Advancements in technologies have increased scale and reduced costs.

Ultimately, despite the headwinds, we still see a need for climate mitigation and adaptation technologies and investment into those companies that provide solutions. However, does this new investment environment require investors to alter their strategies? Potentially so. The more forgiving era of near-zero interest rates and low inflation looks to be behind us, and there will be winners and losers from the climate debate and the policies that ensue. Because of this, we will carry on with our pragmatic approach.

On the regulatory side of things, progress has been made on the Financial Conduct Authority’s framework for sustainable investing, the Sustainability Disclosure Requirements. The much-needed anti-greenwashing rule came into force earlier in the year, and we are beginning to see an uptick in adopting sustainable investment labels. While the universe of these funds remains small, it is promising to see things move in the right direction.

Global conflicts: Navigating uncertainty and division

Unfortunately, we saw these worsen in 2024, and while it is not something you would want to write about in a piece about themes for 2025, their importance on politics/markets is too large to ignore. Geopolitical tensions worsened in 2024, with ongoing conflicts in Ukraine, the Middle East, and rising US-China frictions. Each has significant implications for global markets.

At the time of writing, the Ukrainian occupation of Kursk continues. We have recently seen Russia use a new hypersonic ballistic missile in response to Ukraine’s use of US-supplied long-range missiles. However, upon President Trump’s re-election, President Zelensky has started to talk about wanting an end to the conflict via diplomatic means in 2025.1

In the Middle East, the brutal conflict between Israel and Palestine continues to stoke regional/global tensions, and we will potentially see a power vacuum in Syria after Bashar al-Assad fled to Moscow.

And while there has been no direct fighting, tensions between US/Taiwan and China continue to exist. While perhaps not completely mirroring the Cold War, this growing global divide is certainly disconcerting and something we will continue to monitor while we remain appropriately diversified across our portfolios.

Interest rates and reinflation: A balancing act for 2025

This year’s cautiousness from the Bank of England is expected to continue, spurred by a tight labour market and the potential for reinflation, with the CPI inflation rate rising further beyond the Bank’s 2% target as we end the year.2 Contributing factors to reinflation in 2025 include the threat of Trump’s tariffs, rising oil prices due to ongoing global conflicts, a greater tax burden for businesses due to Labour’s October budget,3 and an increase to the minimum wage in April.4 Market pricing suggests four 0.25% rate cuts over the next 12 months,5 but this is subject to change based on the eventual impact of the aforementioned factors and something we currently see as optimistic.

The European Central Bank has been more generous with its rate cuts in the past year and is predicted to cut rates a further four times in 2025.6 While this aligns with forecasts for the Bank of England, we have seen much more dovish (higher likelihood of rate cuts) tones from the ECB;7 their hand is somewhat forced by growth concerns,8 but also guided by encouraging inflation data.9 Christine Lagarde stated in recent days that the “darkest days” are behind us as inflation eases lower,10 but whether dog days are truly over will hinge on sticky wage-driven services inflation,11 ongoing global conflicts and Trump’s proposed tariffs.

The Federal Reserve has employed some more aggressive cuts in recent months, but the expectation is that this will slow going into next year. Lacklustre inflation figures show some stickiness as the CPI rate remains above the target 2% and has been unbudging in recent months.12 Forecasts suggest growth in line with targets for 2025,13 which could lead to the Fed taking a more measured approach in the next phase of this cutting cycle, in order to maintain some policy room. They will also have to consider the impact of incoming President Trump.

Trump 2.0: Policies, tariffs, and market implications

Donald Trump took a commanding victory in the 2024 Presidential election: winning the Presidency, the House, and the Senate to secure a Republican clean sweep.14 He will see this as a strong mandate to fulfil his campaign promises. It is expected that many tax cuts included in the ‘2017 Tax Cuts and Jobs Act’ will be made permanent, which could mean extensions to cuts on corporate, personal and capital gains rates, with varying effects.15

Cuts to personal tax rates will likely give a boost to domestic demand which could catch the attention of the Federal Reserve, who may be less willing to announce significant rate cuts during warming economic conditions. However, cuts to corporate rates could lead to supply-side expansion, which may spur economic growth without necessarily being inflationary. These cuts should also provide an increase to earnings and initially to markets, though at the cost of a predicted increase in the Federal deficit.

What is likely to bring upward inflationary pressure are the proposed tariffs Trump intends, or claims he intends, to place on foreign imports. Recently threatening BRICs,16 Mexico and Canada,17 he had previously suggested tariffs of between 60-100% on Chinese goods, with 10-20% across the board elsewhere.18 How much of this can be put down to bargaining tactics remains to be seen, but the implementation of such policies is almost certain to bring price pressures to American consumers and businesses.

Turning to deregulation, financial services look set to benefit, while pharmaceuticals may see a lift from faster approvals following the loosening of requirements for new drugs.19 He has also expressed the desire to “Drill, baby!, Drill!” in reference to the oil and gas industries,20 which may cause concern in the renewable energy sector. However, it is worth keeping in mind that Texas, very much a red state, produces the most renewable energy in the US.21 Renewables also have some cost advantages,22 so fears of a renewable apocalypse may be misplaced.

While there was no crystal ball under the tree for the investment team this year, our approach for 2025 remains clear. We will continue to focus on analysing key thematic macro issues, consistently monitoring developments, and maintaining pragmatic, diversified strategies to navigate both opportunities and challenges that lie ahead.

1. https://www.bbc.co.uk/news/articles/c0mzgv4x901o 2. https://www.investopedia.com/cpi-inflation-november-2024-grocery-prices-8759507 3. https://www.gov.uk/government/publications/autumn-budget-2024 4. https://www.gov.uk/government/publications/minimum-wage-rates-for-2025 5. https://www.reuters.com/world/uk/boes-taylor-says-4-rate-cuts-by-end-2025-would-be-gradual-2024-11-19/#:~:text=The%20Bank%20of%20England%27s%20most%20recently%20appointed%20interest,four%20quarter-point%20cuts%20by%20the%20end%20of%202025. 6. https://www.reuters.com/markets/rates-bonds/ecb-cut-rates-by-25-bps-dec-12-least-four-more-likely-2025-2024-12-05/#:~:text=The%20European%20Central%20Bank%20will%20trim%2025%20basis,economy%20slows%20and%20fears%20mount%20about%20U.S.%20tariffs. 7. https://www.investmentweek.co.uk/news-analysis/4388609/dovish-ecb-rate-cut-seeks-bolster-stagnant-eurozone-growth-ahead-tariff-tumult-2025 8. https://www.msn.com/en-us/money/markets/ecb-set-to-lower-key-rate-further-as-protectionism-threatens-says-lagarde/ar-AA1vW3jW?ocid=BingNewsSerp 9. https://www.rte.ie/news/business/2024/1216/1486702-ecbs-lagarde-on-interest-rates/ 10. https://www.ft.com/content/c713c385-2638-44c3-9278-90df4635f025 11. https://www.ecb.europa.eu/press/key/date/2024/html/ecb.sp240830~ef0af8d7cc.en.html 12. https://www.ft.com/content/7b2fef06-1f80-4ccb-b8c7-66acbff44bbb 13. https://www.goldmansachs.com/insights/articles/the-us-economy-is-poised-to-beat-expectations-in-2025 14. https://www.reuters.com/graphics/USA-ELECTION/RESULTS/zjpqnemxwvx/ 15. https://www.crowe.com/insights/president-elect-trumps-tax-proposals-at-a-glance 16. https://www.bbc.com/news/articles/cgrwj0p2dd9o 17. https://www.bing.com/search?q=trump+mexico+canada&qs=n&form=QBRE&sp=-1&ghc=1&lq=0&pq=trump+mexico+canada&sc=8-19&sk=&cvid=8CC8B2EEE9BE47598F829AF16B7D6E3E&ghsh=0&ghacc=0&ghpl= 18. https://abcnews.go.com/Business/trumps-proposed-tariffs-raise-prices-products-experts/story?id=115893557 19. https://www.morganstanley.com/articles/trump-re-election-implications-for-markets 20. https://abcnews.go.com/US/trumps-drill-baby-drill-fracking-agenda/story?id=115869936 21. https://commodity.com/blog/states-renewable-energy/ 22. https://www.forbes.com/sites/globalcitizen/2024/12/16/why-trumps-return-wont-halt-progress-on-clean-energy-says-industry/